Does Bankruptcy Adversely Affect Government Benefits?

No. Many people are surprised to learn that government benefits are exempt assets in Illinois. Furthermore, the exemption isn’t value-based, like the home equity or motor vehicle exemption. Social Security Insurance benefits, SSD benefits, workers’ compensation benefits, VA disability benefits, and all other such benefits are 100 percent exempt. Federal or state pension plan payments are also exempt, regardless of value.

The trustee (person who oversees a bankruptcy for a judge) cannot liquidate exempt property to pay debts, even in a Chapter 7. The written exemptions are broad in Illinois, and a Chicago bankruptcy lawyer knows how to expand them even further. In fact, in most cases, most bankruptcy debtors get to keep all their property after they file. If the trustee challenges an exemption claim, an attorney stands up for the debt in court.

Formal Property Exemptions

Some states, not including Illinois, allow debtors to choose between federal and state exemptions. This lack of choice usually isn’t an issue in the Prairie State, because most filers would most likely choose the state exemptions anyway. These exemptions include:

• Government Benefits: As mentioned, these benefits are 100 percent exempt. Ideally, the government benefits should be in a separate account from wage income, which is normally nonexempt. This arrangement avoids commingling of funds and related issues.
• Home Equity: State law exempts a set amount of home equity. Significantly, there’s a difference between market value and equity value, especially since mortgage loans are amortized. Regardless of the home’s value, if you’ve lived in your house less than ten years, you normally have basically no equity, since the bank applies payments to prepaid interest first.
• Motor Vehicle Equity: The same principle applies to this exemption. Furthermore, motor vehicles depreciate quickly, especially if the driver is in a fender-bender or worse accident. In fact, most used cars have practically no financial value.
• Wildcard Exemption: This exemption alone usually makes the Illinois state exemptions worthwhile. Illinois’ wildcard exemption allows debtors to protect up to $4,000 of any non-exempt property they choose. This exemption can be applied to items like cash in a savings account, equity in a vacation cabin, or a non-exempt car.

Chapter 7 bankruptcy wipes out most unsecured debts, like medical bills and credit card debt, in as little as six months. Chapter 13 debtors have up to five years to catch up on past-due mortgage loans and other secured debts. These debtors are also entitled to unsecured debt discharge.

Informal Property Exemptions

The informal exemptions don’t matter much to government benefits and retirement benefits, because the exemption is unlimited. However, they could make a big difference in another area, such as home equity.

Lien strip-off is a good example. Assume Dorothy bought a $200,000 home with an 80/20 mortgage (a $160,000 senior lien and a $40,000 junior lien). When she files bankruptcy, her home’s actual value has dropped to $160,000.

“Actual value” is different from fair market value. Usually, a written, as-is cash offer from a home investor establishes a house’s actual value.

If the judge agrees with the value set by a Chicago bankruptcy lawyer, the junior lien becomes an unsecured debt, which is dischargeable in bankruptcy. That reclassification saves Dorothy thousands of dollars a year.

Speak With a Hard-Working Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a confidential consultation with an experienced bankruptcy lawyer in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Source:

ilga.gov/legislation/ilcs/documents/073500050K12-1001.htm