Iowa Homestead Exemption Construed

July 7, 2011 | Erin C. Herbold-Swalwell

 

In Iowa, debtors in a bankruptcy proceeding must claim exemptions from the bankruptcy estate under Iowa law because Iowa has opted out of the federal exemptions.  In Iowa, a homestead is exempt from judicial sale in a bankruptcy proceeding. An Iowa homestead “must embrace the house used as a home by the owner, and, if the owner has two or more houses thus used, the owner may select which the owner will retain (Iowa Code §561.1).

Here, a married couple (the debtors) owned multiple residential properties in Iowa and Florida between 1999 and 2010. Often, the debtors “flipped” the homes by remodeling and then selling them- hoping for a profit.  During that time, the debtors resided in several of the homes. The debtors identified one Iowa property as their homestead from 1999-2004. In 2004, the debtors moved to another home in Iowa which was subsequently destroyed by a fire. In 2006, the debtors once again moved to another Iowa property. That year, the debtors sold one of the Florida properties, netting roughly $471,000. The wife maintained that this was her homestead at the time. In 2007, the debtors began avoiding creditors by transferring one of the Iowa properties into the name of another couple. A home was constructed on the property and the debtors reimbursed the other couple for the cost of construction. The home was built to the debtors specifications.  In 2008, a creditor obtained judgments exceeding $2 million against the debtors. The Iowa home, where the couple was living at the time, was turned over to the bank. Thus, the debtors moved into the newly constructed home and the other couple transferred title back into the debtors’ names.

At the beginning of 2010, the debtors filed for Ch. 7 bankruptcy protection. The debtors claimed the homestead exemption on the property turned over to the bank two years earlier. The bank objected and the bankruptcy court concluded that the debtors were not entitled to a homestead exemption on the property. The debtors appealed, arguing that the lower court had misinterpreted Iowa law on the issue of the claimed homestead exemption.  But, the appellate court held that the debtors were not entitled to claim the homestead exemption on the Iowa property because the bank’s debts arose before the debtors’ purchase of the property.  According to Iowa Code §561.21(1), a homestead may be sold to satisfy debts contracted before the acquisition of the homestead, but only to satisfy the remaining debt and after exhausting other property of the debtor.  Here, the debtors acquired the property in question several months after the bank obtained its judgments against them.

Thus, the debtors were not entitled to the protection of the homestead exemption. Though the debtors were able to prove that the property was their homestead, they did not use the proceeds of a homestead acquired before the debt was incurred to the bank. They only purchased the homestead after the debt was incurred and knew full well that they owed a substantial money judgment to the bank. The debtors also argued that the bank should have satisfied their debt from other nonexempt assets first, instead of going after the homestead.  This issue must be addressed by looking to state law by the lower court. However, the only issue on appeal was whether the couple was entitled to the homestead exemption in Iowa. The lower court did properly construe Iowa’s homestead exemption rules here. In re Walters, No. 10-6075, 2011 Bankr. LEXIS 2055 (B.A.P. 8th Cir. Jun. 2, 2011)