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Iowa Bankruptcy Exemptions and Law
Why File for Bankruptcy?
When someone files for personal bankruptcy, Americans can be quick to label that person as someone who rang up large consumer debts with out-of-control spending habits. But there are many situations where you may end up facing bankruptcy despite careful management of your finances.
For example, a large percentage of personal bankruptcies are the result of medical bills that the patient could not pay off. Additionally, some people find themselves with overwhelming debt when they lose what had been a steady job. Finally, you may have lost a lawsuit that requires you to pay damages that you cannot afford.
However you ended up in debt, filing for bankruptcy is often the first step in resolving your payment obligations so you can move on with your life. Bankruptcy forces your creditors to stop their collection actions and gives you the breathing room you need to resolve your debt problems either through a payment plan or by eliminating your debt entirely.
When you file for bankruptcy in Iowa you will do so in one of the state's two federal bankruptcy courts. While the U.S. Bankruptcy Code governs those courts, they must take into account Iowa's rules regarding what property you can protect from your creditors. You can keep that “exempt" property to help you move on with your life after you have finished with your bankruptcy case.
The Bankruptcy Code also provides a list of federal exemptions, but when you file for bankruptcy in Iowa, you must use the state exemptions. Fortunately, in most situations, the Iowa exemptions are more generous than those offered under federal law.
Which Type of Bankruptcy Should I Choose?
Nearly everyone who files for personal bankruptcy will do so under one of two chapters in the Bankruptcy Code: Chapter 7 or Chapter 13. Both chapters will allow you to resolve your debt issues, but each does so through a different process. Knowing how bankruptcy works under each chapter will help you determine which one is best for your financial situation and what assets you will be able to keep.
Chapter 7 Bankruptcy
Chapter 7 is the most common type of personal bankruptcy and is available to people whose disposable income is below certain levels. Chapter 7 is often called a “liquidation" bankruptcy because you will turn over most of your property that is not protected by an exemption to a trustee who will sell it to repay your creditors. Essentially, your non-exempt assets will be liquidated to pay your creditors.
In return for giving up your non-exempt assets, in a Chapter 7 case, the bankruptcy court will discharge almost all of your unpaid debt, leaving you debt-free while still owning your exempt property. Chapter 7 is also relatively quick, with judges often discharging your debts within four or five months of filing for bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy forces your creditors to work with you to create a payment plan that will pay off your debts over three to five years. Before the court approves the plan, you will need to show that you have a steady source of income that will let you make the required payments under the plan.
Your Chapter 13 plan may require your creditors to reorganize their debts so they are paid off over the term of the plan. It can even force some of your creditors to accept payments that are less than what you owe.
The Automatic Stay Protects You From Creditors
When you file for any type of bankruptcy, the court will automatically issue a stay to stop your creditors from undertaking any collection activity. This should put an end to harassing phone calls, foreclosures, and lawsuits so that you can resolve your debt problems through the bankruptcy process.
The stay has the added benefit of forcing your creditors to participate in the bankruptcy process. If a creditor tries to contact you outside of bankruptcy in an attempt to collect what they are owed the judge can impose penalties and even force your creditor to pay your attorneys' fees.
Secured vs. Unsecured Debt
While you likely see your personal debt as just bills you are unable to pay, there are several categories of debt and they each receive different treatment in bankruptcy. The two most common types are secured and unsecured debt. How much of each type you have will likely control the amount of debt you can shed during bankruptcy and how much property you will keep.
You have unsecured debt when you owe money to a creditor who has no right to repossess your property for non-payment. In other words, the creditor holds no security interest in your property. Most people who file for bankruptcy have at least some unsecured debt, with some of the most common types being credit card debt, unpaid medical bills, and outstanding court judgments.
With secured debt, your creditors have the right to repossess or seize specific property if you fail to pay. Often, the security interest is created when you sign a contract with a lender pledging some of your property as collateral for the loan. Mortgages and car loans are among the most common types of secured debt in personal bankruptcies.
Secured and Unsecured Debt in Chapter 7
After you have turned over your non-exempt assets to a trustee and they have been sold, those funds are distributed among your unsecured creditors. Any unsecured debt that remains after payment has been made will be discharged and you will no longer owe those creditors anything. In most Chapter 7 cases, the debtor has few — if any — assets, and the unsecured creditors receive almost nothing.
However, not all unpaid unsecured debt will be discharged in bankruptcy. If you have “priority" unsecured creditors, you will be required to pay them, even after all of your other unsecured debts have been discharged. Examples of priority unsecured debt are unpaid child and spousal support obligations.
Secured creditors fair better in most Chapter 7 cases. That is because they retain their security interest in your property during bankruptcy. While the automatic stay may stop them from seizing your property for a time, eventually you will need to take one of three actions:
- Give the collateral to your creditor. This is usually the simplest solution because, while you will lose the property, you are usually free from making additional payments on the debt.
- Keep the property and work out a payment plan with the creditor. You may be able to do this if an Iowa exemption covers the equity you have in the property.
- Pay off the loan and keep the collateral. This rarely happens in a Chapter 7 case where the person filing often has few assets to their name.
Secured and Unsecured debt in Chapter 13
When you file for Chapter 13 bankruptcy, you will work with the court to develop a creditor payment plan you can afford based on your income. If you do not have enough income to make payments under a bankruptcy plan, you cannot file under Chapter 13.
Your Chapter 13 plan will usually repay your debts over three to five years. The plan often restructures your debts to pay them in installments and may force creditors to accept less than they are owed. If you are a homeowner, your mortgage payments will not be included in the plan and you must continue making those payments outside of bankruptcy if you want to keep your home.
Unsecured creditors usually receive more in a Chapter 13 case than they would under Chapter 7, but it is rare that they a fully repaid. That is because the plan pays the unsecured creditors with whatever disposable income is left over after the secured creditors have been paid. Any unsecured debt that was not paid under the plan will be discharged by the court when it has been completed.
Not everyone can file for bankruptcy under either Chapter 7 or Chapter 13. If you would like to file under Chapter 7, you will need to show the court that your income is low enough to qualify using one of two means tests.
The first means test simply looks at whether your household income is less than the median income for Iowa households of the same size. If your income is lower, you can file under Chapter 7. According to U.S. Census data, Iowa households had the following median incomes in November 2020:
- One person: $51,095
- Two people: $70,892
- Three people: $80,912
- Four or more people: $95,199
If your household income is greater than the state median, you may still qualify to file under Chapter 7 if you can show that you have very little or no discretionary income each month. That is usually calculated based on a formula that takes into account your average monthly earnings and monthly expenses.
To file under Chapter 13, you will only need to show that you have a steady income that will cover the required payments under your plan, unsecured debts of $419,275 or less, and secured debt of no more than $1.26 million.
Anyone who files for bankruptcy in Iowa must use the state's property exemptions. If your property falls within one of the exemptions, you can protect the property from your creditors.
Married couples who file for bankruptcy together can often claim an exemption for each spouse for property they own together. However, this doubling of the exemptions does not apply to the homestead exemption.
Iowa offers one of the country's most generous homestead exemptions because it lets you keep all of the equity you have in your home.
You can keep up to 75% of your disposable income or 40 times the minimum wage each week, whichever amount is higher. You can also keep up to $1,000 of your accrued wages and tax returns.
Motor Vehicle Exemption
Iowa lets you exempt up to $7,000 of the equity you have in a motor vehicle.
The wildcard exemption allows you to protect up to $1,000 of your personal property in bankruptcy, including cash.
Personal Property Exemptions
Up to $7,000 of the following are exempt:
- Household goods
- Musical instruments
- Health aids
Wedding and engagement rings are exempt and other jewelry is exempt up to $2,000. The wedding ring exemption is capped at $7,000 if you bought the rings after marriage and within two years of filing for bankruptcy.
Iowa provides these additional personal property exemptions:
- $1,000 for a private library, Bibles, and paintings
- One shotgun
- One rifle or musket
Tools of the Trade Exemption
Iowa provides an exemption of up to $10,000 for non-farming equipment used in your business or trade. The exemption also applies to farm equipment, livestock, and feed.
Insurance Benefits Exemption
The following insurance benefits are exempt in Iowa:
- Life insurance proceeds if the policy has a clause prohibiting its use to pay your creditors
- Up to $15,000 in proceeds from life, accident, or health insurance policies if your spouse, child, or dependent is a beneficiary
- Public employee group insurance benefits
Pension and Retirement Exemptions
Iowa provides an exemption for most pension and retirement benefits, including:
- Most tax-exempt retirement plans, such as 401(k)s, IRAs, and defined benefit plans
- Federal government pensions
- Firefighter, police officer, and peace officer pensions
- Public employee pensions
- Other pensions needed for your support
Public Benefits Exemptions
The following public benefits are exempt:
- Social Security
- Unemployment compensation
- Workers' compensation
- Veterans' benefits
- Local public assistance
- Aid to families with dependent children
- Adopted child assistance
- Necessary alimony and child support payments
- The property of a business partnership
- Liquor licenses
If you are planning on filing for bankruptcy, you must first complete a pre-bankruptcy credit counseling course from a provider the U.S. Trustee Program has approved. The course will help you assess whether you can pay your debts outside of bankruptcy. When you file, you must include a certificate showing that you completed the course within 180 days of filing.
When you file for bankruptcy using an attorney, they will generally take care of the filing for you. If you are filing for bankruptcy without a lawyer, you will begin the process by downloading the correct forms for your district bankruptcy court.
Where Do I File for Bankruptcy in Iowa?
Iowa has two bankruptcy court districts. They operate courts in the following locations:
Northern District of Iowa:
- Cedar Rapids: 111 7th Ave. SE Cedar Rapids, IA 52401
- Sioux City: 320 6th St., Sioux City, IA 51101
Southern District of Iowa:
- Des Moines: 110 East Court Ave., Des Moines, Iowa 50309
If you are not sure where you should file, use the U.S. Court Finder to locate your court.
The Chapter 7 filing fee is $338 and it will cost you $313 to file under Chapter 13. The court understands that if you are filing for bankruptcy it may not be able to afford the filing fee and will let you pay in installments. Additionally, if you earn less than 150% of the poverty line, the court may waive the filing fee.
Most people who file for personal bankruptcy hire an attorney to represent them. Most Iowa bankruptcy attorneys will charge between $900 and $1,500 for a straightforward Chapter 7 filing, but that can vary substantially based on your financial situation and where you live in the state. Chapter 13 cases are generally more complex and lawyers charge more in those cases.
Looking for Help Filing for Bankruptcy in Iowa?
The bankruptcy process is intimidating and those who are filing for bankruptcy are usually dealing with the emotional consequences of their financial distress. It is generally not a situation you should face alone, which is why it is recommended that you hire an attorney to help guide you through the bankruptcy process. A qualified local attorney will represent your interests during the bankruptcy case to ensure you get rid of as much debt as possible while keeping the property to which you are entitled.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.