Illinois Homestead Exemption increase – A new reality for creditors and lenders

Financial institutions and creditors may face sharply reduced recovery prospects under Public Act 104-120, which takes effect on January 1, 2026.

The law greatly expands homestead protections for Illinois debtors by amending 735 ILCS 5/12-901, raising the homestead exemption for individual property owners from $15,000 to $50,000.

For co-owned properties, the exemption increases from $30,000 to $100,000, with each owner’s share based on their ownership percentage.

This change creates major new hurdles for creditors trying to collect from debtors. A home is often a debtor’s most valuable asset, and creditors have traditionally relied on home equity to satisfy outstanding debts.

The homestead exemption blocks creditors from recovering equity as long as the debtor’s individual equity stays below the exemption limit. Under the previous law, creditors could pursue collection when equity exceeded $15,000. Now, they cannot do so unless equity surpasses $50,000.

The expanded exemption applies broadly to single-family homes, condominiums, cooperatives, and certain personal property used as a residence. The impact is easy to illustrate: consider a jointly owned home valued at $350,000 with a $250,000 mortgage.

The property has $100,000 in equity. Under the old law, because the equity exceeded $30,000, a creditor could record a memorandum of judgment, force a sale, and recover up to $70,000. Under the new law, that same $100,000 in equity is fully protected, eliminating the creditor’s ability to collect on a judgment lien.

The increased exemption also affects bankruptcy cases by reducing the likelihood that a debtor’s homestead equity will be available for distribution to creditors.

Properties that once offered meaningful collection opportunities may now provide no recovery at all, forcing creditors to rethink risk assessments and collection strategies. Financial institutions should begin evaluating exposure immediately and update underwriting standards and collection procedures to account for the far higher exemption threshold.

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