Making Sense of Bankruptcy: Erasing a Judgment Lien from the Title to Your Home in a Chapter 7 “Straight Bankruptcy”
May 27, 2015
A judgment lien puts a cloud on the title to your home. Bankruptcy can often get rid of the underlying debt and the judgment lien as well.
This is the sentence that we’re explaining today, phrase by phrase:
A judgment lien that attaches to your home can be permanently removed (“avoided”) in a Chapter 7 bankruptcy under certain conditions.
A judgment lien on your home is dangerous. It is a claim imposed against the equity in your home that arises from a judgment against you. In many circumstances the creditor which got the judgment lien can execute or foreclose on the lien, forcing the sale of your home to pay the debt owed on the judgment.
Judgment liens result from you being sued—by creditors or other parties—and losing the lawsuit so that a judgment is entered against you. Most of the time that results in a judgment lien being recorded against your home. You often don’t know that the lien exists. Sometimes you don’t even know that you’ve been sued, much less that you’ve lost the lawsuit by default and now have a judgment lien on your home.
Even if you know about the lawsuit and agreed to settle with the creditor by making payments, a judgment may (sometimes unexpectedly) be required as part of that settlement. Or if you do not make payments as agreed, a judgment may then be imposed, with the resulting lien on your home.
All in all, if you are a homeowner and have been having a difficult time financially, there’s a good chance you have a judgment lien on your home.
Judgment Lien Attaches to Your Home
Even if the creditor holding a judgment lien can’t or doesn’t foreclose on your home, the lien can be a serious immediate and long-term problem.
It seriously harms your credit rating. Because a judgment lien is a matter of public record, anybody can find out about it, not just those legally allowed to pull your credit report. It either altogether destroys your ability to refinance your home or requires you to pay the judgment debt in full, reducing or erasing the equity that you can get out of your home.
And even if you have no equity in your home that the judgment lien can attach to right now, the lien can sit on your title for many years until the value of the home rises enough so that the lien does eventually eat into your equity.
So a judgment lien makes you home less your own home. Any way you look at it, it makes your home worth less, economically and emotionally.
Permanently “Avoiding” a Judgment Lien in Bankruptcy
A judgment lien can often be gotten rid of forever through the judgment lien “avoidance” procedure of bankruptcy. It’s important to realize that this is quite an unusual procedure because bankruptcy writes off most debts but generally does not get rid of liens. Most types of liens—like your vehicle lender’s lien on your car or truck title, or your home mortgage—continue to exist after bankruptcy.
So how can judgment liens be “avoided” through bankruptcy? What makes them so special? Bluntly, because Congress has decided that people’s rights to a certain amount of equity in their homes come ahead of a creditor’s rights under a judgment lien—at least within certain circumstances. After all, undoing a judgment lien simply puts the creditor back in the same unsecured position it was in before it sued you and got the judgment lien on your home.
Judgment Lien “Avoidance” Available Under Chapter 7, Not Just Chapter 13
Many of the powerful ways that bankruptcy helps homeowners with home-related debts are available only if you go through a 3-to-5-year Chapter 13 “adjustment of debts.” If you are behind on your mortgage payments, have a second or third mortgage, or have an income tax or child/spousal support lien, you should find out if you need the strong tools available only under Chapter 13.
But you don’t have to go through the lengthy Chapter 13 procedure to do a judgment lien “avoidance.” If you meet the conditions, you can get rid of a judgment lien in a matter of just 3 or 4 months in a Chapter 7 “straight bankruptcy.”
The Conditions Needed
So here are the conditions you need to meet to “avoid” a judgment lien:
The real estate to which the judgment lien has attached must be one you qualify for as your “homestead.” The rules for this differ in different states—differ quite widely sometimes—but usually a “homestead” is the place that is your home.
The lien to be “avoided” must be a “judicial lien,” which is defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
The “judicial lien” cannot be based on a debt for child or spousal support, nor can it be on a mortgage foreclosure.
The judgment lien at issue must “impair the homestead exemption.” The homestead exemption is usually the amount of equity in your home that is protected from the reach of your general creditors. For example, it’s the equity you can have in your home that is beyond the reach of a Chapter 7 trustee. A judgment lien “impairs” the homestead exemption to the extent that it eats into that protected equity. To illustrate, if the homestead exemption available in your state protects your home equity up to $50,000, your home is worth $200,000, and you have a mortgage of $170,000, then your equity of $30,000 (the home’s value minus the mortgage) would all be protected by the homestead exemption. In this situation if a creditor has a judgment against you and a recorded judgment lien against your home in the amount of $25,000, of that $25,000 “impairs the homestead exemption”—eats into the equity that is protected by that exemption.
So in the above example if the real estate that the judgment lien attached to qualified as your “homestead,” and if the lien didn’t come from a debt for child/spousal support or a mortgage foreclosure, that $25,000 debt would likely be “discharged”—permanently written off—and the judgment lien would be “avoided”—permanently erased—from your home’s title.