Besides legally writing off all or most of your debts, “straight bankruptcy” can often remove judgment liens from the title of your home.
Chapter 7 bankruptcy usually has two main goals, and usually accomplishes them. #1: Filing the bankruptcy case immediately stops your creditors from collecting against you and your assets. #2: It legally wipes out forever, or “discharges,” all or most of your debts.
In many Chapter 7 cases those are the benefits it provides. Often those are just the benefits that you need.
But Chapter 7 provides other benefits. Especially if you can’t decide whether or not you should file bankruptcy, these other benefits may help your decision.
“Avoidance” of Judgment Liens on Your Home
The following conditions must be met to remove a judgment lien from your home’s title:
The judgment lien must be on your home, your legal “homestead.”
You must qualify for and claim a homestead exemption on that home. That usually means that you are living there now, or even if you are not living there at the moment, it is the home you intend to return to.
The lien you are trying to remove must be a “judicial lien.” That means a lien that the creditor created through a court judgment. A “judicial lien” is defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
The debt that the judgment lien is based on CAN’T be for child or spousal support, or for a mortgage foreclosure.
The judgment lien must “impair” the homestead exemption. Essentially that means that to the extent that there is any equity in the home, the judgment lien eats into the equity that is protected by the homestead exemption on the home.
So for example, if:
You own a home worth $230,000 with a mortgage of $200,000, and so you have equity of $30,000 in the home.
Assume for our example here that the amount of homestead exemption available to you in your state is $35,000.
A creditor sues and gets a judgment against you for $20,000, which turns into a judgment lien against your home in that amount.
The entire amount of that $20,000 judgment lien eats into the $30,000 home equity that is protected by the homestead exemption. The judgment lien “impairs” the homestead exemption. So the judgment lien would be “avoided,” or released through the power of the Chapter 7 bankruptcy case.
Takes an Extra Procedure
Filing the Chapter 7 bankruptcy and through the 3-4-month process would very likely discharge the debt that caused the judgment and its lien. But getting the release of the judgment lien itself takes an extra step. That extra step—usually a motion filed by your attorney in the bankruptcy court—must be done or else the judgment lien will continue to exist against your home.
This is important because otherwise you could find out that the judgment lien continues to be on your home title months or years later when you’re trying to refinance or sell your home.
Also, the motion to avoid the judgment lien should be filed while your Chapter 7 case is still open and active, again within about 3-4 months after you file your case. If your Chapter 7 case is completed and closed before you or your attorney files the motion, the procedure to avoid the judgment lien would likely cost you hundreds of dollars more in extra filing fees and attorney fees.
So if you own a home, find out if you have a judgment lien against its title. If you do, talk to a bankruptcy lawyer about whether that lien could be “avoided” in a Chapter 7 bankruptcy case. If so, gaining this very important extra benefit for your home could make filing bankruptcy much more beneficial for you.