There are several steps you can take during bankruptcy to eliminate or reduce liens. But these procedures are neither automatic nor required: You have to request them.
Ways to Get Rid of Liens on Your Property
There are several bankruptcy procedures designed to deal with liens and security interests on your property. The choice of which procedure to use for each item of secured property is up to you.
The most powerful of these procedures lets you eliminate (avoid) some types of liens on certain kinds of exempt property without paying anything to the creditor. With the lien eliminated, you get to keep the property free and clear without paying anything more to the creditor.
To learn more, see the articles in Avoiding (Getting Rid of) Liens in Bankruptcy.
Getting Rid of Liens by Redeeming Property
Other procedures let you eliminate a creditor’s lien (and keep the property) by paying the creditor either the amount of the lien or the current replacement value of the property, whichever is less. (To learn more, see Redeeming Secured Property in Chapter 7 Bankrupty.)
Getting Rid of Liens by Surrendering Property
Finally, you can rid yourself of a lien simply by surrendering the property to the creditor. (To learn more, see Surrendering Secured Property in Chapter 7 Bankruptcy.)
If You Don’t Eliminate Liens
If you do not take steps to eliminate a lien as a part of your bankruptcy case, the lien will survive your bankruptcy intact, and the creditor will be free to take the property or force its sale if you fall behind on the payments. Fortunately, the courts are very liberal about reopening a case to allow a debtor to file a motion to avoid a lien. So if, after your bankruptcy case is over, you discover a lien that you missed while your bankruptcy case was open, don’t worry. Reopening a bankruptcy is a routine procedure.
If the property is valuable and could be easily resold (an automobile, for example), the creditor will surely repossess the item at the first opportunity unless you agree to keep your payments current. If, however, the property is of little value and not worth the cost of repossessing (such as your beat-up couch), the creditor may do nothing.
If the property is of the type with a “title” or ownership document, such as a house or car, and the creditor does nothing, the lien simply remains on the property until you sell it. At that time, the lien must be paid out of the proceeds of the sale if the buyer wants to have clear title to the property. On the other hand, if the property has no ownership title document, as would be the case with a computer, or a washer and dryer set, the creditor has no practical way to enforce the lien. In some cases, if the property is declining in value and it is clear that you aren’t going to take steps to keep it, the creditor might ask for the bankruptcy court’s permission to take the property even before your bankruptcy case is over. For example, if you own a new photocopier subject to a security interest and the copier depreciates in value at a fairly steep rate (say, 30% a year), the creditor would want it back as soon as possible to get the highest price on resale.