Bankruptcy can’t get rid of most creditor liens on what you own. But judgment liens on your home are an exception.
Our last blog post was about judgment liens, why they are so dangerous, and how both Chapter 7 and 13 types of bankruptcy can deal with them. Today’s blog post explains what determines whether a particular judgment lien can be removed, or “avoided,” and how that’s done.
The Rules for “Avoiding” Judgment Liens
If a creditor has sued you and gotten a judgment, and your name is on the title of any real estate, including your home, most likely that creditor now has a judgment lien against that real estate.
If you file bankruptcy, the debt that was the basis for that judgment would in most cases be legally discharged (written off forever). But the judgment lien is legally separate from that debt. The lien could survive the bankruptcy discharge, unless you qualify for judgment lien “avoidance.”
To qualify for “avoidance” the judgment lien has to meet these conditions:
The real estate to which the judgment lien attached has to be your “homestead.” That means you qualify for and claim a homestead exemption on that real estate. Homestead exemption laws vary depending what state you are in when you file bankruptcy, but generally the place you are living qualifies as your legal homestead.
The lien being “avoided” can’t just be any kind of lien but has to be a “judicial lien,” defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Generally that means that the lien resulted from a judgment entered against you in a lawsuit or similar legal procedure.
The “judicial lien” can’t be related to child or spousal support or a mortgage foreclosure.
The lien has to “impair” the homestead exemption. That essentially means that the lien eats into that part of the equity in the home that is protected by the applicable homestead exemption. Specifically the law says that a judgment “lien shall be considered to impair [a homestead] exemption to the extent that”:
1. the value of all the liens on the house that are ahead of the judgment lien being “avoided”
2. PLUS the amount of that judgment lien being “avoided”
3. PLUS the amount of the homestead exemption that you are entitled to
4. EXCEEDS the value of the house (assuming you are its sole owner).
For example, assume that your homestead exemption (the amount you can protect) is $30,000, your home is worth $200,000, your first mortgage balance is $170,000, and you owe $2,000 in accrued but not yet paid property taxes. Your home has a recorded judgment lien in the amount of $15,000.
1. The value of the two prior liens on the home—the mortgage and the property tax lien, added together ($170,000 + $2,000) totals $172,000.
2. Add to that the judgment lien amount ($15,000) to make $187,000.
3. Then add the homestead exemption ($30,000) to total $217,000.
4. That $217,000 exceeds the $200,000 value of the home by $17,000.
So the impairment is $17,000. Since that is larger than the amount of the judgment lien of $15,000, then entire lien is considered impaired—all of it eats into the homestead exemption. As a result, the whole judgment lien can be fully “avoided”—taken off the home’s title.
Partial Judgment Lien “Avoidance”
A judgment lien could be only partially “avoided.”
In the above example change the market value of the home from $200,000 to $205,000. Then the total of the prior liens, the judgment lien, and the homestead—$217,000—would exceed the $205,000 value of the home by $12,000. So, $12,000 of the $15,000 judgment lien could be “avoided.” This would leave a non-avoidable lien of the remaining $3,000.
The “Avoidance” Doesn’t Happen Automatically
Judgment lien “avoidance” takes an additional legal procedure within your bankruptcy case. If that procedure—usually a motion filed by your attorney—is not done the judgment lien will continue to attach to your home title after the bankruptcy case is finished.
So that procedure should be done while your bankruptcy case is still open and active. If not you may be able to reopen your case later, but that would likely cost you hundreds of dollars more in court and attorney fees. Furthermore you may not be able to reopen your case if doing so “prejudices” the creditor—such as if in the meantime it incurred costs in starting a foreclosure of your home.
Chapter 7 or Chapter 13
Unlike other features of consumer bankruptcy, judgment lien “avoidance” is available under either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”
In a Chapter 7, besides the judgment lien being taken off the title (either in full or in part as just described) usually the avoided lien debt amount is discharged, or permanently written off. This usually happens only 3 or 4 months after the case is filed.
In Chapter 13, the avoided lien debt amount is added to the rest of the “general unsecured” debts. Over the course of the 3-to-5-year Chapter 13 payment plan, you pay the pool of all your “general unsecured” debts as much as you can afford to pay, but only after paying other higher priority debts in full. This means that the avoided judgment lien debt amount is usually paid only pennies on the dollar and sometimes nothing.
Often, adding the avoided debt amount to that pool of “general unsecured” debts does not at all increase the total amount you need to pay to finish your Chapter 13 case. That’s because the same amount you pay into the pool is just redistributed among those creditors.
At the end of the Chapter 13 case whatever part of the avoided judgment lien debt amount has not been paid gets forever discharged.
Conclusion
So, if you own a home which has a judgment lien recorded against it, getting that lien “avoided” is an important extra benefit of filing bankruptcy. It’s a great help in getting a fresh financial start on your home and on your entire financial life.