If you have judgment liens recorded against your property, such as your home or car, you may be able to get rid of those liens in Chapter 7 bankruptcy. This is called “lien avoidance.” (If you don’t know what a judgment lien is, see What Is a Judgment Lien?)
Here’s when you can avoid judgment liens.
What Judgment Liens Can You Avoid?
A nonconsensual judgment lien on property can be avoided if all of the following are true:
- The lien resulted from a money judgment issued by a court.
- You are entitled to claim an exemption in at least some of your equity in the property. (To learn about exemptions, see Bankruptcy Exemptions.)
- The lien would result in a loss of some or all of this exempt equity if the property were sold. (That is, the exemption would be impaired.)
If these three conditions are met, you can remove judgment liens from any exempt property, including real estate and cars.
When You Should Avoid Judgment Liens
Use lien avoidance if it’s available, especially if a lien can be completely wiped out. Even if you don’t need or want the property, you can avoid the lien, sell the property, and use the money for other things.
To keep things simple, you may want to avoid liens only on property that is completely exempt. The lien will be eliminated entirely and you’ll own the property free and clear, without paying anything to the creditor.
Even partial lien avoidance can be beneficial, but sooner or later you’ll have to pay the amount remaining on the lien if the property has a title document or is subject to repossession or foreclosure on what’s left of the lien. Most often, you’ll have to pay off the lien in a lump sum, but some creditors may be willing to accept installments, especially if you compromise on the value of the lien.
How to Avoid a Judgment Lien in Bankruptcy
You request lien avoidance by checking the column “Property is claimed as exempt” on the Statement of Intention, and by filing a motion.
Some bankruptcy filers don’t realize they have liens on their property, or don’t realize that they could eliminate those liens. Others may not be able to eliminate liens when they file for bankruptcy (typically, because they have no exempt equity in the property), but later they become eligible to do so. Fortunately, bankruptcy courts are very liberal about allowing a debtor to reopen a case in order to file a motion to avoid a lien.
Avoiding Liens When There Is No Equity in the Property
Some courts have allowed debtors to avoid judicial liens even if there is no equity in the property (and therefore no “impaired” exemption). Their reasoning is convoluted (in our humble opinion) since it would seem impossible for a lien to impair an exemption if there is no equity to exempt. Nonetheless, if a lien has been placed on your home and you have no equity or negative equity, you should still consult with a lawyer on whether that lien can be avoided in your bankruptcy court. Even if the lawyer is pricey, it may be worth your while to get the lien removed.
To learn about avoiding other types of liens, and other ways to deal with liens, see the articles in Avoiding (Getting Rid of) Liens in Chapter 7 Bankruptcy.