As an Iowa Bankruptcy Attorney I have discovered that understanding and applying the exemption laws of one’s state (in our case Iowa) way before one is in financial trouble or heading towards insolvency is extremely useful. People often make financial decisions that covertly challenge their fiscal stability and in the long run turn out to be huge mistakes.
Let’s take some simple examples. First, one which has been a big factor in creating the mortgage foreclosure crisis has been refinancing or taking a second mortgage on one’s home. People who have equity in the house are often encouraged by aggressive lenders to treat that equity as if it were savings. By refinancing the loan or taking a second loan against the equity, cash was put in the person’s pocket for uses suggested by the lending industry– such as paying down credit cards, college tuition or vacations.
During the mortgage crisis of the last several years, however, it became obvious that this was fatal for many previously stable budgets. Loans were given (sometimes based on deceptive, over-appraised home values), and the cash was taken and spent. The short term goal was achieved–nice vacation, credit card debt gone, and so forth. What was not understood was that the mortgage terms were often very much different than fixed mortgage the owner originally had. There was often no legal representative assisting the person taking the mortgage–just brokers and lenders having people sign documents. Who needs to waste money on lawyers? Right? Also, the lender was going to sell the loan immediately and it had no risk in persuading many, many families to take these loans.
The result: adjustable rate mortgages, option loans and balloon loans have wrecked havoc on people’s lives–and homes. They did not understand that the home is not a financial investment–it is the foundation for one’s future security. (The appreciation of homes is generally at the same pace as inflation, thus no gain). Treating the equity as a savings account turned into a disaster for many individuals and families, including the road to bankruptcy for those who were in great shape before they took the loan.
The real loss was that in a state like Iowa, the equity in the home is usually exempt from any unsecured creditors. For the most part, that equity was safe–beyond the creditors’ clutches. The rationale is that this is not just about money, it is about all of the intangible aspects of one’s life and the family circle . There is something precious about the homestead which even lawmakers, who are highly influenced by the credit industry, have recognized and applied to our lives.
This is only one example of the importance of learning the exemptions in your state and in effect living by them.
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa