What Happens If One Waives Homestead Rights in Illinois?

Back in the days when it was common for one spouse to work and the other to stay at home and raise the family, the state of Illinois enacted the laws of homestead. Homestead rights were originally intended to protect wives and minor children should their property-owning husband decide to sell their home from under them. Today, the main benefit of homestead rights is to prevent a sale of the home by creditors to pay the homeowner's debt.

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Homestead rights are designed to help you avoid becoming homeless just because you cannot pay your debt. Currently, anyone who owns and occupies a home as a primary residence can exempt $15,000 worth of real estate from a creditor's collection efforts. If both spouses appear on the title, you can pool your homestead rights and protect $30,000 value in your home. In other words, if the total equity of your home does not exceed $15,000 or $30,000 for joint property, then a creditor cannot sell your property to satisfy a court judgment, and creditors cannot get hold of it in a bankruptcy. The homestead exemption is automatic in Illinois – you don't have to do anything to claim it.

Homestead rights do not provide absolute protection against creditors. If you have more equity in your home than the exemption amount, then the creditor can still seize and sell your entire property. The creditor just has to pay you the amount of the homestead exemption from the sale proceeds before the creditor is paid. Since homestead rights are created by state law, federal law overrides them. So, you couldn't claim a homestead exemption to avoid paying a federal tax debt. Perhaps more significantly, there's no protection if you use the house as collateral for a mortgage. The bank will always be able to foreclose if you fall behind on your mortgage payments – although the first $15,000/ $30,000 of the foreclosure sale proceeds will belong to you.

Whenever homestead rights exist, they act as a cloud on the title. That's because a mortgage company cannot recoup all its losses up to the full loan amount in case of foreclosure, since part of the property is exempt from creditors' claims. Few banks will lend money on this basis. So, if you're taking out a mortgage in Illinois, the bank will almost certainly require you to waive your homestead protection. The effect is simple: in foreclosure, the bank gets to keep all proceeds from the sale up to the amount of the mortgage debt plus costs. You're essentially giving up your right to keep the first $15,000 or $30,000 from the sale.

In Illinois, the homestead exemption can be claimed only by someone who owns and occupies the home. So, if only one spouse appears on the title, then that spouse alone has the right to claim a homestead interest, even if other people live on the property. Illinois law is very clear, however, that releasing or waiving homestead rights requires the consent of both spouses. So even if you don't own the homestead property, you'll still need to sign a waiver of homestead rights to enable your spouse to mortgage the home.

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