Lien Removal in Bankruptcy: Your Guide to Financial Freedom

Facing a lawsuit or the possibility of losing your home can be incredibly stressful. You might wonder if there’s a way to protect your assets and achieve a fresh financial start. Lien removal in bankruptcy might be a possibility, though it can be complex.

If a creditor has placed a lien on your property, bankruptcy could potentially help. This process allows you to get rid of certain liens, providing the opportunity to rebuild. This is especially the case with a “judgment lien.”

What is a Judgment Lien?

A judgment lien is a court-ordered lien. This differs from a “voluntary lien,” where you consent to the lien as part of a loan, such as a mortgage or car loan.

A judgment lien occurs when a creditor sues you and obtains a favorable ruling. This creditor can then use this money judgment to place a lien on your real estate or, in some cases, personal property. This action transforms a previously unsecured debt into a secured debt.

An unsecured debt, like a credit card balance, becomes a secured debt through a lawsuit and a court-ordered money judgment. The judgment is then recorded.

How Judgment Liens Affect Property Owners

The usual method involves recording it with the county recorder’s office. In some states, a court victory grants the judgment creditor an automatic lien on personal property. This prioritizes that creditor in the repayment process.

For instance, if a judgment creditor perfects a lien on a property, you may need to pay them from the sales proceeds. This payment occurs before any other distributions when you sell that property.

This also applies if a title company finds a lien on your property in their search with the local bankruptcy court or recorder’s office. A bankruptcy attorney can categorize debts to determine if a creditor lien can be removed in your bankruptcy filing. The goal being, to have that debt be considered as unsecured debt and potentially be removed during the bankruptcy proceeding.

How Bankruptcy Can Help With Liens

Bankruptcy offers powerful options for eliminating debts and providing financial relief. One key advantage is the possibility of removing liens in specific situations.

Bankruptcy can eliminate your legal responsibility to pay a debt. However, the lien on your property typically survives the bankruptcy, though there are exceptions.

This distinction is crucial. The creditor might not be able to pursue you personally for payment, but they could still hold rights against your property via the lien.

Lien Avoidance: The Power of Bankruptcy Code § 522(f)

A significant provision of the Bankruptcy Code is Section 522(f). It enables you, under specific conditions, to “avoid” (remove) a judicial lien impairing an exemption you can claim.

If a judgment lien affects a property you could have exempted, you might be able to remove the lien entirely. This effectively increases your “exempt” equity.

Here’s an example: If your property is worth $200,000 with a $150,000 mortgage and a $70,000 judgment lien, you might be able to remove the judgment lien. This is called “avoiding liens” and many people file bankruptcy just for this reason.

If you file for bankruptcy in a state with a $50,000 homestead exemption like here in New York, you might be able to take steps for removal. The court could potentially eliminate the judgment lien, allowing you to fully utilize your $50,000 homestead exemption. This scenario presumes no other complexities, like non-exempt property or specific state laws, are involved.

Voluntary vs. Involuntary Liens: A Key Distinction

Knowing whether a lien is “voluntary” or “involuntary” is crucial in bankruptcy. It helps to see if that lien might survive Chapter 7 or 13.

Voluntary liens arise when you agree to grant a creditor an interest in your property. Examples include mortgages and car payments, in addition to, lines of credit. You are giving them the right to place lien on your property.

Involuntary liens are imposed on your property without your explicit agreement. These include tax debt and judgment liens, and also involuntary statutory liens. These involuntary judgment liens may be subject to removal during the bankruptcy process, and there is even a risk losing your property if you do not take care of them.

Lien Removal in Bankruptcy: Chapter 7 vs. Chapter 13

The specific bankruptcy chapter you file significantly influences your ability to address judgment liens. Your options will differ between Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy and Lien Avoidance

In Chapter 7, you generally cannot eliminate voluntary liens, such as mortgages, without repaying the debt. However, an alternative may exist.

You can petition the court to remove, or “avoid,” certain involuntary liens. Specifically, a judicial lien stemming from a court judgment may be applicable here.

The lien must meet specific criteria for this process. You’ll need to submit a separate motion, formally requesting it and providing supporting documentation in your bankruptcy paperwork. This also will be determined on your property equity, local bankruptcy rules, and the original money judgment, which a creditor may use to force pay through bank levy, wage garnishment, or to try and become a secured creditor.

Lien Stripping in Chapter 13 Bankruptcy

Chapter 13 bankruptcy provides a process known as “lien stripping.” This offers a way to deal with involuntary judgment.

You’re eligible for this when there’s a “junior lien” that is entirely unsecured. Junior liens often arise from a second mortage or other junior involuntary judgment liens that came after the primary mortgage.

The table illustrates a property’s status before bankruptcy. Since the home’s value is less than the first mortgage, Chapter 13 bankruptcy might allow you to file a motion and strip the junior liens.

Lien stripping is exclusive to Chapter 13 Bankruptcy. This can be very powerful and it helps turn unsecured creditors back into being unsecured since their involuntary judgment liens will be gone. In Chapter 7 cases, if you do not act on judicial liens, that lien remains, but your personal liability for the debt itself might be gone.

What if You Forgot to Remove the Lien?

Realizing after completing bankruptcy that you could have potentially had the lien stripped, can be disappointing. It’s a common issue but, it’s important to consult a bankruptcy attorney immediately.

It might not be too late. They could advise you to act quickly and file a motion, as your bankruptcy case will need to be reopened.

A skilled attorney can review your situation and advise on potential options. These may include attempting to reopen your bankruptcy case or exploring other legal avenues, as sometimes a lien survives chapter 7 if the correct motion is not filed.

Working with a Bankruptcy Lawyer

Dealing with judicial liens and other statutory liens, can be complicated, given the personal property that they attach to. Seek legal advice and make sure you are clear on all liens that exist.

Find appropriate support to manage liens effectively in bankruptcy. Many attorneys offer consultations at reduced rates, or even free of charge, for initial advice and option assessment, even after your bankruptcy discharge.

Seek help, promptly. If you neglected to remove a lien that you were eligible to remove during bankruptcy, there are still steps you can pursue, to help protect property and deal with the judgment debtor and eliminate lien that may be eligible for removal.

Conclusion

Liens serve as a crucial tool for creditors to secure payment, but do not always protect the creditor when it comes to bankruptcy. While the process might seem complicated, understanding the basics of lien removal can be beneficial.

Bankruptcy laws, including the possibility of removing certain judgment liens and other creditor lien issues, make it important to understand how this impacts things. Seeking guidance is very important for achieving success in your case. Make sure you talk with someone about how involuntary judgment can turn unsecured debts into secured debts and how to possibly avoid that.

Seeking professional legal advice is always recommended when filing bankruptcy. A qualified attorney specializing in bankruptcy law can offer clarity on protecting your property and getting out of debts, including a plan on avoiding liens.