It’s common for a bankruptcy client to wonder what property is part of the bankruptcy and whether they’re in danger of losing it. The simple answer is that ALL property owned at the time of filing is included in the bankruptcy but rarely does a debtor in Iowa ever lose any of it.
When someone files bankruptcy, an “estate” is created that includes all of a debtor’s legal and equitable interest in any property held on the date of filing. This includes all personal and real property, whether or not there is a lien or mortgage on it and whether or not it is “exempt.” This includes tax refunds owed prior to the bankruptcy, even if they’re received after the filing. The bankruptcy estate also includes all money held in financial accounts, security deposits, wages accrued or owed on the date of filing, the debtor’s interest in corporations and any claims the debtor could bring against someone else, like a personal injury claim. In addition to the interests in property held on the date of filing, the estate might also include any money or property the debtor receives within 180 days of the bankruptcy filing because of an inheritance, life insurance payment or property settlement resulting from a divorce. The earnings or proceeds that a debtor receives as compensation after the bankruptcy is filed is NOT part of the bankruptcy estate.
Even though the bankruptcy estate includes nearly all property, in Iowa that doesn’t mean debtors lose much. Iowa’s personal property exemptions cover much of what most debtors own, including homesteads, significant amounts of personal property, retirement accounts, business and farm equipment, accrued wages and tax refunds. And bankruptcy trustees in Iowa are frequently willing to negotiate with debtors on keeping nonexempt property. When there is substantial nonexempt property a debtor can always consider filing a Chapter 13 bankruptcy that allows a debtor to keep the property and pay it’s value over time.
The lesson is that debtors shouldn’t pay much attention to the stories about people losing possessions when someone files bankruptcy. It rarely happens and doesn’t need to happen at all because of the opportunity to file Chapter 13 or negotiate with a trustee.