Professor Mason Cooley once said, “Procrastination makes easy things hard, hard things harder.” That is especially true for an individual who puts off bankruptcy relief. Delaying bankruptcy can lead to judgments, garnishments, foreclosure or repossession. Fortunately, bankruptcy offers a second chance at a fresh start to procrastinators.
Judgments can create liens against real property. When this happens, the creditor may force the sale of the real estate to satisfy the judgment, but in most cases, the judgment creditor will place a lien on the property and wait until it sells. During that time interest is accruing. Whatever equity is building in the property is reduced by the increased interest from the judgment lien.
Filing bankruptcy will discharge the debtor’s personal obligation to the judgment creditor (meaning the creditor cannot pursue collection efforts against the debtor), but bankruptcy will not extinguish a lien on real estate (meaning the creditor can still attack the land for its money). Thankfully, the Bankruptcy Code contains a provision that allows a bankruptcy court to avoid the judgment lien. Lien avoidance is only available when certain conditions are met:
1. The lien must be a judicial lien (created by a judgment).
2. The creditor’s lien must impair the debtor’s legal exemption
3. The creditor’s lien may be avoided to the extent that the debtor is entitled to claim an exemption in the property.
For example, if your home is worth $300,000, a first mortgage of $200,000, a second mortgage of $50,000, and a homestead exemption of $50,000, then there is no non-exempt equity available in the property. If you also have a $20,000 judgment lien against your home, the lien is not actually secured by any value in your home. The $20,000 lien “impairs” the homestead exemption. Consequently, the bankruptcy court can order the judgment lien “avoided” and the obligation is forever discharged at the end of your case.
A judgment lien may be avoided in part. Suppose in the above example there was $10,000 in non-exempt equity in the home, and a $20,000 judgment lien. The bankruptcy court may reduce the amount of the lien to the value of the non-exempt equity ($10,000). The remaining $10,000 impairs the debtor’s homestead exemption and may be discharged forever at the end of the case.
Tax liens are not avoidable in Chapter 7 even if they impair exemptions. Tax liens are statutory liens, not judicial liens. Tax liens can be avoided in Chapter 13 to the extent the lien is greater than the asset’s value.
Judgment liens are often avoided during bankruptcy with little resistance from creditors. If you have a judgment lien on your home, speak with an experienced bankruptcy attorney. The Bankruptcy Code offers several options for dealing with judgment creditors.