Here are some resources that should help you:
I am not a lawyer but I am a landlord here in PA. So I have some knowledge that may or may not be directly applicable to your state. There are aspects to your situation that I can only guess at. I don't know if you have a lease or any sort of written agreement at all. It "sounds" like you might just be a "month-to-month" renter. But that's only a guess.
I don't know how things work in IL. But, usually it's like this - you or your landlord must provide 30 days written notice. If you don't provide 30 days written notice, and just leave ... they keep your security and they can sue you in small claims court for the month that that you didn't provide them notice for. They also could try and sue you for damages that they might claim that you caused (whether you did or not). So, it's very important that you have lots of photos to cover your butt.
Oh ... by the way, the next time that they come by and demand to be let in to YOUR APARTMENT, or just come in when you aren't there - I would call the police. This almost certainly violates the law in your state. The officer WILL protect your rights, and then you will have established this behavior with an officer of the law. Make sure that the officer fills out a report and that you get a copy of it.
Now I could be wrong but the way the law usually works is that a landlord must provide 'reasonable notice' before they may enter your apartment, whether you are there or not - UNLESS there is an emergency (plumbing leak, smoke, fire, etc).
It's definitely a good plan to get out as fast as you can. While it is possible for you to fight and win, to keep your security - it's "only $250". Bear in mind that your idiot landlord will have a VERY hard time filling your apartment this time of year. So just by leaving at the end of January, you will be hurting him for much more than $250. Life is short and $250 isn't a lot of money vs. your piece of mind.
So - TAKE those photos, so when he turns around and tries to sue you, you can immediately show all those photos to the judge and the judge will immediately know that the landlord is trying to pull a fast one. Whatever you do - do not cause any damage on your way out. Just leave as quickly and quietly as possible, with immediate written notice - so that you'll be living somewhere else in February.
I have no idea whether your apartment is a legal one or not. You could easily check with your local town administrative office and ask them. Usually they have to be inspected every year or two and registered as rental units. If it's not, then that is a lot of leverage for you and you can get that security back (or you'll turn them into the town)!
I also know what it is like to be in your shoes. Many years ago, after college, I rented a room in a house with about 6 other people. It so happens that the 2 rooms in the basement that were being rented out where not legal by the town's code. So when the landlord tried to keep my security when I moved out, I told him very directly that if I didn't have my security back in 24 hours that I'd tell the town about the basement apartments. Yes - I got my security back that afternoon :-) And I kept my side of the bargain.
Americorp Real Estate
Brokers Associate, e-PRO
If you can honestly write-up something like "2 men, single working professionals, non-smokers and no pets, looking for 2 BR apartment, Excellent references, etc". If you can do that - then I guarantee that you WILL have landlords calling and emailing you - and FAST.
When the landlords ask why you are moving, I would be "reasonably honest with them". I wouldn't tell them anything danger signals like "talking to the town or the police". No landlord wants a potential problem. Just tell them that your landlord upstairs is very noisy, stomping around all the time, and that it really gets in the way of your sleep and you like things very quiet. Hopefully you guys are not party animals that love techno :-)