When one files bankruptcy in any state there are some key factors to consider about your property. You want to have property exempt so the trustee cannot take it, liquidate it and use the money to pay unsecured debt such as credit card or medical debt.
There are rules called exemptions to protect the property (real or personal) to varying amounts–depending on the state. One of the most import rules for people is the homestead exemption. When you own a home which is your primary residence it can have equity in it. That means the fair market value of the house is more than what you owe on the mortgage(s). For example, your house could sell for $125,000 and you have two mortgages, totaling $90,000 owed. That leaves $35,000 in equity.
This equity would be handled differently in each state. But if the Iowa exemption rules apply to you, your home equity would be completely exempt. In other words, a creditor (except for the mortgage holder) has no right to that money–in bankruptcy or even in a lawsuit. They could not force the home to be sold. That $35,000 is exempt. It is protected because in a state like Iowa the homestead is highly valued for the health, safety and well being of the owner.
Iowa is unusual because in a bankruptcy in which Iowa exemptions govern the case the amount of the homestead exemption is UNLIMITED. That means that the equity could be any amount of value and it would be protected against creditors. Even the bankruptcy trustee under usual circumstances would have no right to get the equity to pay unsecured creditors. There are only three states, Iowa, Texas and Florida, that have unlimited homestead exemptions.
As an Iowa bankruptcy lawyer I have had cases in which clients had hundreds of thousands of dollars of equity in the home yet it was safe from the creditors. The main exception would be if the debt you owed was incurred before you started a homestead. (Note, a homestead is defined as a series of rollovers from one home to the next). For example, the debtor owes a hospital money, does not pay it, buys a home and builds up equity. If a proper lawsuit were filed by the hospital and no other resources were available to pay for the judgment, the home equity could be attached due to the debt pre-existing the homestead.
There of course are other issues that could come up which might foil the exemption. A large pay down of the mortgage with money used from the sale of non-exempt property before filing the bankruptcy could jeopardize the exemption. It really depends on the circumstance and the amount involved but generally the rule is th at people who are or become insolvent through certain transactions are not allowed as a result of that transaction to defraud creditors. This could be a fraud so it could be reversed and the equity attacked.
Finally, as stated, if there was a judgment against you for unsecured debt, the equity could not be touched. Under the Iowa law, however, a lien on the house for the judgment exists if the lawsuit was in the county where you own the home. A creditor cannot force the sale of the house but when you go to sell it you have to pay off the lien to clear the title. The value of a bankruptcy is that not only would the debt you owed on the judgment be liquidated, but you can also have the lien removed through asking the court to do so. After that you can sell the house free and clear.
The main lessons are: if you are needing a bankruptcy do not move your property around until you have spoken with an Iowa Bankruptcy Attorney. Also, recognize that if you have the correct guidance you can and should be able to protect your homestead equity from creditors. As long as you can pay your mortgage, you (and your family) will have a roof over your head to protect you from the storm. And lastly, your home equity is not just some savings account. It is all about a homestead and you should not treat it’s equity like savings–this is very risky and is one of the main causes for the foreclosure boom that is underway today.
Iowa Bankruptcy Attorney Robert J. Liptak
Fairfield, Southeast Iowa