Iowa bankruptcy courts have been split for a decade over a simple question: Can a consumer exempt a motor vehicle under state law and strip a non-purchase money lien on the car as a tool of trade under bankruptcy law. That split was resolved in favor of consumers by the 8th Circuit Bankruptcy Appellate Panel last month.
The curious conflict between Northern and Southern Iowa revolved around a simple question, to bankruptcy lawyers. Bankruptcy law allows a debtor to “avoid” or remove a lien on (already-owned) tools used in your trade, given to a creditor to secure a loan — at least to the extent you can exempt the tools. Because Iowans can only claim the exemptions provided by their state law, they can exempt a motor vehicle, but not a motor vehicle specifically as a tool of trade.
But what if the motor vehicle at issue is used in their trade (e.g. a dump truck)? Can you “exempt” the truck as a motor vehicle under the state law, and avoid the non-purchase money lien given to a creditor based on the tools of trade use of the vehicle, in reliance on federal law? If you lived in Northern Iowa, the answer was yes. If you lived in Southern Iowa, the answer was no.
The BAP concluded in June that the Northerners got it right. Chief Judge Kressel pointed out that although the Bankruptcy Code incorporates the idea of allowing states to decide the extent of property that could be protected from creditors through exemptions. But when Congress invented the power for consumers to avoid even a consensually-granted lien on exempt personal property where the lien was not for funds used to actually buy the thing — what many of us refer to as “taking hostages” to assure payment — under section 522(f), it was creating a federal policy. Under federal law, a consumer can strip off those types of liens attaching to specific types of — or uses for — that personal property. So despite Iowa’s decision not to protect specifically things used in a profession or trade, the things it does protect (like a car) that are used in trade will have this extra benefit under federal law.
The irony of course is that it took judges from Minnesota, Missouri, and Nebraska on the BAP to resolve this decade-long dispute for the Iowa courts. Fortunately the resolution also helps consumers achieve a more meaningful fresh start as well.
Case: In re Cleaver, #08-6052 (8th Cir BAP 2009)
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