When Divorce and Bankruptcy Collide

If you are looking at filing for divorce and bankruptcy, which do you do first? Couples may choose to file for bankruptcy jointly before getting a divorce. This will allow them to discharge both parties’ debts before filing for divorce and taking the issue of debt division out of the divorce process as much of their unsecured debts have been eliminated or discharged. The exemptions allowed also play a role in whether you file for bankruptcy before or after a divorce. If there is a joint filing, you may be able to double the allowable exemptions which may also be an incentive to file for bankruptcy before a divorce if you have assets to protect.

What is Exempt in Illinois (What You Can Keep When Filing Bankruptcy)

  • Homestead — up to $15,000 in equity in your home
  • Motor Vehicle — up to $2,400 in one motor vehicle
  • “Wildcard” Exemption — If an exemption amount does not cover personal property that you would like to keep (does not include real estate) you can use this exemption or use it for an item that is not protected up to $4,000
  • Alimony, Support, and Maintenance — the amount reasonably necessary for support.
  • Cemeteries and Burial Funds — pre-need cemetery sales and future care funds
  • Claims for Negligence or Tortious Conduct — payment made to you from a wrongful death of a person who was your dependent to the extent reasonably necessary for your support and a personal injury award up to $15,000
  • Crime Victim’s Compensation — 100% of any compensation for a crime
  • Franchise, Permit, and License Interests including liquor permits
  • Fraternal Benefit Society Benefits — 100%
  • Insurance Benefits — Life insurance, annuity proceeds, or cash value if the beneficiary is insured’s child, parent, spouse, or another dependent
  • Life insurance proceeds to a spouse or dependent — to extent needed for support
  • Health, disability, or unemployment benefits
  • Partnership Property — under the Illinois Uniform Partnership Act
  • Pension and Retirement Benefits
  • Personal Property such as necessary — wearing apparel; bible and school books; family pictures; professionally prescribed health aids; a certificate of title to any a watercraft over 12 feet in length; prepaid tuition trust fund; Illinois College Savings Pool accounts invested more than one year before filing if below federal gift tax limit, or two years before filing if above
  • Public Assistance — 100% exempt
  • Trade Implements — $1,500 in all tools of your trade
  • Unemployment Compensation — 100% except for certain child support claims
  • Wages — 85% of your gross earnings or 45 times the federal minimum hourly wage per week, whichever is greater
  • Worker’s Compensation -100% exempt
  • Veteran’s Benefits — 100% exempt

In Chapter 7 bankruptcy, a bankruptcy trustee sells property that is not exempt and uses the proceeds of the sale to pay your debts. In Chapter 13 bankruptcy, you keep all your assets and pay the value of the property that is not exempt to unsecured creditors (credit cards, utility bills, etc.) over a period of time which is generally a repayment plan that takes 3 to 5 years.

How long does bankruptcy take?

Impact of the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005

Bankruptcy Cannot Discharge Spousal Support or Child Support Obligations

“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) does not discharge an individual debtor from any debt- to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.” Paragraph (5) is the exception known as “domestic support obligation”. Domestic Support Obligation is defined as a debt that accrues before, on, or after the date of bankruptcy discharge, that is (A) owed to or recoverable by a spouse, former spouse, their child or their child’s parent, legal guardian, or responsible relative or a governmental unit. (B) in the nature of alimony, maintenance, or support (including government assistance) of a spouse, former spouse, their child or child’s parent. © established or subject to establishment before, on, or after the date of bankruptcy discharge by a (i) a separation agreement, divorce decree, or property settlement agreement or (ii) an order of court; or (iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and (D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child or child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt. [11 U.S.C. 523(a)(15)]

Creditors and Dividing Debts in Divorce

Addressing Division of Debt in the Marital Settlement Agreement

Impact of the Family Expense Act

Family Expenses under Illinois Law

  • Medical bills,
  • Funeral expenses,
  • Clothing,
  • Jewelry,
  • Rent for the family home,
  • Repairs for the family home, and
  • Wages for a domestic servant.

This list is not all-inclusive but just an example of those things that are considered family expenses in Illinois.

Filing Bankruptcy During the Divorce Process

Bankruptcy and Discharge of Student Loan Debt

Consult with an Experienced Chicago Divorce Attorney Before Your File

THIS ARTICLE WAS PREVIOUSLY PUBLISHED AT: https://illinoislawforyou.com/divorce/divorce-and-bankruptcy-collide/

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