Under Illinois law, homeowners have protections in place to prevent the loss of their primary residence when creditors collect on debts. The Illinois homestead exemption allows homeowners to exempt up to $15,000 of equity ($30,000 for married couples) from collection attempts from creditors, potentially preventing the seizure, foreclosure, and sale of their home.
The Illinois Homestead Exemption
When collecting on debts from individuals, one option to satisfy those debts is their real estate, such as a house or condo. This is especially true if they have used this property as collateral, such as in a mortgage. In those cases, it’s typical to seize the home and sell it to recoup losses.
However, a homestead exemption applies that could prevent this from happening if the property is being used as the debtor’s primary place of residence. In Illinois, up to $15,000 in equity can be exempted in this way. This means that if the debtor has paid off no more than $15,000 of their mortgage, for instance, their home typically cannot be taken away.
In addition, if they have more than $15,000 in equity built up, that $15,000 still needs to be refunded to the debtor after the sale of their home. Note also that the exemption amount is doubled to $30,000 if the home is owned by a married couple. Finally, this exemption is applied automatically, which means homeowners don’t need to file for it.
The Homestead Exemption and Foreclosures
Foreclosing a home is sometimes necessary to collect on debts owed on a mortgage. However, if the home is the primary residence of the debtor, it may not be possible to foreclose on it. If they come below the exemption amount on their equity interest, reselling the property would be against Illinois law. As such, other avenues, such as renegotiating the mortgage, may be best.
Homestead Exemptions in Bankruptcy
In bankruptcy law, a homestead exemption may be handled in a couple of ways depending on the type of bankruptcy filed.
Chapter 7
Under Chapter 7 bankruptcy, the debtor may need to sell their home to satisfy their debts. However, if their home is exempt under Illinois homestead protection law, it cannot be seized.
On the other hand, if their equity interest is more than the exemption, their home may be sold, but they must be reimbursed for the exempted amount.
Chapter 13
Under Chapter 13 bankruptcy, there is no forced sale of the property. Instead, the debtor pays the nonexempt portion of their equity as part of their Chapter 13 repayment plan. Of course, this isn’t always possible if there is a lot of equity built up, which means they may still need to sell the home, even if doing so isn’t strictly enforceable by law.
Staying Within Legal Bounds
When collecting on debts or foreclosing property, it’s important to stay within the bounds of the law. Doing so helps keep liability to a minimum. The Illinois homestead exemption is one of those laws that should be respected in the course of debt collection.