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Iowa Debtor's Home Not Exempt From Sale to Satisfy Preexisting Judgment Debts - Walters v. Bank of the West

April 13, 2012

Vincent Howard and our Highland foreclosure defense attorneys were interested to see a bankruptcy case in which the debtor tried to use bankruptcy as a way to avoid foreclosure to cover a debt created by a legal judgment. Most bankruptcy cases attempting to avoid foreclosure are cases involving mortgage debt, not judgment debt, so the circumstances and defenses were different in Walters v. Bank of the West. Jody May Walters and her husband David guaranteed loans for David's homebuilding business. After they were unable to pay back the loans, Bank of the West got three Iowa state court judgments against Walters and others. Walters eventually filed for Chapter 7 bankruptcy and claimed a homestead exemption in her own home, but the bankruptcy court and the Eighth Circuit agreed that her home was not exempt under Iowa law.

Walters is appealing a case decided by the Eighth Circuit's Bankruptcy Appellate Panel last year, which found that her Pleasant Hill, Iowa, home did not quality for the new homestead exemption provided by Iowa law. Walters and her husband guaranteed business loans issued by Bank of the West in 2002 and 2004, undisputedly before purchasing the Pleasant Hill home; the bank obtained its judgments against them in 2008 and 2009. In January of 2010, she filed for bankruptcy, claiming an exemption for the home. Bank of the West challenged the claimed exemption, and after a hearing, the bankruptcy court sided with the bank. It found Walters may not claim an exemption for a home acquired after the debts were incurred to the bank. She appealed to the Bankruptcy Appellate Panel, arguing that the Pleasant Hill home was exempt because it was bought with the proceeds of a previous homestead in Florida, but the panel ruled the exemption did not apply because the previous home was never her homestead under Florida law.

On appeal to the Eighth Circuit, Walters renewed the new homestead argument, but cited a chain of previous Iowa homes rather than the Florida home. She added in the alternative that Bank of the West had not yet exhausted all of her non-exempt assets. The court found neither argument compelling. Though there is some doubt that the "chain of previous homes" issue was preserved for appeal, the court said, that's irrelevant. Rather, it said, the plain language of Iowa's new homestead statute requires that the new homestead be acquired with the proceeds of a previous one, and it found no evidence for this. It next dismissed the argument that the bank is required to exhaust other assets before taking her home. While the Eighth had sympathy for the argument that debtors could otherwise lose an opportunity to keep their homes, it said Walters failed to show this was a danger in her own case. Indeed, she owed so much more to the bank than the home's value that her trustee declined to intervene, the court noted. Thus, it upheld the BAP.

Led by partner Vincent Howard, our Orange foreclosure defense lawyers routinely handle cases challenging the right to foreclose a home obtained during the mortgage bubble. However, Walters is in a weaker position than people with mortgage liens, because a judgment lien like hers doesn't have the same kind of built-in consumer protections. As a rule, it's difficult, though not impossible, to escape a legal judgment during bankruptcy. It can be done, but the debt must meet certain conditions, including not being a debt for taxes, child or spousal support or certain kinds of personal injures. If you're seeking bankruptcy to address this kind of debt, it's important to talk to an experienced Buena Park foreclosure defense attorney like Vincent Howard early, so you can plan your claims.

If you're tired of fighting your lender or loan servicer for foreclosure help that doesn't seem to be coming, call Howard Law, P.C., instead to discuss your legal options. You can reach us at 1-800-872-5925 or send us a message online.

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