Bankruptcy can help you wipe out many kinds of debts, but a bankruptcy discharge does not automatically erase liens creditors have on your property. That means you could still lose property you thought you would be able to keep – even if you successfully file for bankruptcy.
That’s because creditors who have a lien on your property have certain rights to that property. Fortunately, there may be a way to keep your property even if a creditor has a lien on it: by filing a motion to avoid a judicial lien.
Successfully avoiding a judicial lien in bankruptcy isn’t easy. You need to meet several qualifications and file the right paperwork with the court. In this post, we discuss judicial liens in bankruptcy and how to avoid them. To learn more, keep reading or call A Bankruptcy Law Firm, LLC for help.
Liens and Bankruptcy
Creditors can have several types of liens against your property, and you can’t avoid all types of liens in bankruptcy. Whether you can avoid a lien depends on the type of lien and the type of bankruptcy you are filing. Below, we define three main types of liens.
Voluntary Liens
A voluntary lien is one you agreed to. The creditor gave you a significant loan, and you agreed to use the property you purchased with that loan as collateral. That means the creditor will have a legal right to take the property if you don’t fulfill the terms of the loan.
In general, you can’t avoid a voluntary lien in Chapter 7 bankruptcy, and you can only do so under specific conditions in Chapter 13.
Involuntary Statutory Liens
An involuntary statutory lien is “involuntary” because you did not agree to it. Instead, the lien was placed on your property because you failed to pay something you owed, such as taxes (a tax lien) or bills for work done on your property (a mechanic’s lien).
As a debtor filing for bankruptcy, you really have no option to avoid an involuntary statutory lien. Under relatively rare and highly specific circumstances, the bankruptcy trustee assigned to your case may be able to get rid of some types of involuntary statutory liens.
Involuntary Judgment Liens
An involuntary judgment lien occurs when one of your creditors sues you for not paying back your loan properly and receives a court judgment for a certain amount of money. This amount translates to an interest in your property in the form of a lien.
This type of lien is also called a judicial lien. And it is the type of lien that a Motion to Avoid a Judicial Lien can help you avoid.
What Is a Motion to Avoid a Judicial Lien in Bankruptcy?
A Motion to Avoid Judicial Lien is a motion your bankruptcy attorney can file in bankruptcy court to remove an involuntary judgment lien from your house or other property after you have completed bankruptcy. That way, the creditor who sued you to obtain the judicial lien on your property will no longer have a legal interest in that property after your bankruptcy.
The actual document your attorney files for you will have information about the judicial lien and the property it is placed on, as well as information about you and the creditor that has the lien. If the court grants the motion, it will issue a court order that invalidates the lien.
How to Avoid a Judicial Lien in Bankruptcy
Bankruptcy is meant to give you a fresh financial start. But if your creditors’ interest in your property remains after your other debts are discharged, that isn’t really a fresh start. That’s why it is important to determine whether you can file a Motion to Avoid a Judicial Lien to get rid of the lien on your property and start rebuilding your finances.
To avoid a judicial lien, you have to meet specific requirements. These requirements are different in Chapter 7 and Chapter 13 bankruptcy.
Getting Rid of Judicial Liens in Chapter 7 Bankruptcy
To remove a judicial lien in Chapter 7 bankruptcy, you must file a successful Motion to Avoid a Judicial Lien. For your motion to be successful, the lien against your property must have certain characteristics:
- The lien must be a judicial lien, meaning it was placed on your property as a result of the creditor suing you for an unpaid loan. It cannot be an involuntary statutory lien or voluntary lien.
- The lien cannot be a result of child support or alimony obligations.
- The lien must conflict with a bankruptcy exemption you can take under federal law or the laws of Illinois or Missouri (whichever state you live in). Exemptions allow you to protect certain property or equity in property from liquidation during Chapter 7 bankruptcy.
For a lien to conflict with a bankruptcy exemption and therefore qualify for avoidance, your right to exemption must be threatened by a possible sale of your property by the creditor that has the lien. For example, in Missouri and Illinois, you can exempt $15,000 of equity in your home. If your home has a lien on it and the creditor’s seizing and sale of your home would conflict with your rightfully exempted equity, this lien may qualify for avoidance.
Getting Rid of Judicial Liens in Chapter 13 Bankruptcy
In general, it is somewhat easier to remove liens in Chapter 13 bankruptcy. You can avoid liens in Chapter 13 through two main methods:
- Cramdowns
- Lien stripping
Chapter 13 Cramdowns to Avoid Liens
In Chapter 13, auto loans are the most common debts that debtors cram down. In fact, a cramdown can’t be used on your home, so this type of lien avoidance may not work for you if you have a lien on your principal residence.
However, if you do need to remove a lien from another type of property, such as a car, a Chapter 13 cramdown could do the trick. This process allows you to reduce the amount of your debt to the value of the property that secures the debt. So, for a car loan, you could reduce the amount you owe to the value of the car using a cramdown.
Your Chapter 13 repayment plan will account for the value of the property instead of the full value of the loan. And once you have completed your repayment plan, which should only cover a portion of the new loan amount, your debts will be discharged. That means you will own your vehicle without the lien that was previously on it.
Chapter 13 Lien Stripping
Lien stripping applies more specifically to real estate liens. Here’s how it works: If you have a second mortgage (also called a junior lien) on your home, but the value of your home is less than the amount owed on the first mortgage, the second mortgage is unsecured. That means you can pay it along with your other unsecured debts in your Chapter 13 repayment plan.
After you have completed your three- to five-year repayment plan, the unsecured debt of the junior lien will be discharged along with your other debts, and the lien will, in effect, have been removed.
Avoiding Part of a Lien
In many cases, you will not be able to avoid an entire lien, but partial lien avoidance is possible. If you are entitled to exempt a certain amount on a certain type of property, but that exemption doesn’t cover the full value of the property that has a lien on it, you may be able to avoid only part of the lien.
For example, if you would like to use Illinois’ wildcard exemption of $4,000 on a jewelry collection that is worth $8,000, but a creditor has a judgment lien on your jewelry items for $5,000, you can avoid $1,000 of the lien. That’s because the lien against the jewelry conflicts with $1,000 of your rightful exemption of $4,000.
Avoiding a Judicial Lien When You Don’t Have Equity
In Chapter 7, lien avoidance is technically only possible if you have equity in the property that qualifies for an exemption that the lien would impair. However, in some cases, bankruptcy courts will grant motions to avoid judgment liens even without an impaired exemption.
That is why it is so important to contact a trusted bankruptcy lawyer to discuss your options. Your attorney can look at the unique details of your case and help you understand your options.
Reopening a Bankruptcy Case to File a Motion to Avoid a Judicial Lien
What if you complete your bankruptcy, get your debts discharged, and find out later that you had a lien against property you exempted? Unfortunately, this is a somewhat common occurrence because many people do not realize they have a judicial lien against their property when they file for bankruptcy.
If this is your situation, there may be some hope. Your bankruptcy attorney may be able to help you reopen your bankruptcy case to file a Motion to Avoid a Judicial Lien to avoid the lien. Keep in mind that you might have to pay a fee to reopen the case, but the fee will likely pale in comparison to the value of avoiding part or all of a judicial lien.
Helping You Avoid Judicial Liens in Bankruptcy
Judicial liens are common obstacles that those who file Chapter 7 or Chapter 13 bankruptcy must overcome. At A Bankruptcy Law Firm, LLC, we pride ourselves on our ability to help our clients gain a true financial restart through bankruptcy — and avoiding judicial liens is often a part of that process.
If you are hoping to avoid a judicial lien in bankruptcy, our bankruptcy lawyers can help. By advising you of your options and filing a Motion to Avoid a Judicial Lien, we can get you to where you need to be. To get started, call (800) 7-BENSON or reach out to us online to schedule a free initial consultation.
