Rental income protected by homestead exemption

Understandably, filing for bankruptcy can lead to a lot of anxiety. However, Illinois residents may be interested to learn that bankruptcy exemptions can provide some relief.

In a recent case, a federal bankruptcy judge ruled that a state’s homestead bankruptcy exemption applies to rent proceeds from a cell tower located on a debtor’s residential land. The judge found that the woman needs the rental income to make her home mortgage payment.

The bankruptcy trustee objected, claiming that the cell tower was not part of the homestead exemption. The tower does not belong to the woman and, therefore, would not normally be subject to the homestead exemption. However, this objection was overruled. Although the homestead exemption applies to proceeds from the sale of a home, the judge noted that the issue of its application to rent had not yet been determined. The judge found that the rent proceeds from the tower were the woman’s right to retain.

Although filing for bankruptcy provides the filer with a fresh start, the process can cause the filer to worry about his or her home, car and property. However, as exemplified in the above case, bankruptcy does not necessarily mean that the filer must begin from scratch. Because of this, bankruptcy laws provide exemptions for filers to keep certain property.

Because Chapter 7 is considered a liquidation bankruptcy, wherein property is sold to pay off certain debts prior to a discharge, exemptions exist to protect certain property from being sold. Chapter 7 bankruptcy allows for a variety of exemptions. A few include automobile and personal property exemptions, including clothing, home furnishings, jewelry and appliances. These exemptions can face limits, however, so wildcard exemptions are available in some states for items that are not included in typical categories.

There is also a homestead exemption which can come as some relief to a filer worried about the security of his or her home. Homestead exemptions, however, vary by state and the federal exemption is currently $20,000. Also, federal and state exemption laws can vary so it is important to understand them and how they apply to an individual filer.

Those facing Chapter 7 bankruptcy might feel like they are facing an uncertain future. However, understanding the exemptions that might be available to them may bring some level of relief.

Source: Thomas Reuters News & Insight, “Homestead exemption applies to cell tower, judge says,” Dec. 21, 2012

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Rental income protected by homestead exemption