Chapter 7 and Chapter 13–Avoiding Judgment Liens on Your Home
An underappreciated benefit of filing bankruptcy is that you can usually remove judgment liens from your home’s title.
In so many ways Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are very different, particularly in the tools they each use to help with your home mortgage(s) and other debts related to the home. But the removal, or “avoidance,” of judgment liens is one tool that can be used in either bankruptcy procedure.
What is a Judgment Lien?
First, a lien is a creditor’s legally enforceable interest in your property. Second, a judgment lien is an involuntary lien which usually attaches to your home after a judgment is entered against you in a lawsuit. It is a lien on your home’s title, in effect making the home collateral on the debt.
Judgment liens can arise in unexpected ways. Usually you know you’ve been sued and at some point find out that the lawsuit resulted in a judgment against you and a judgment lien on your home. But a judgment lien can attach even if you settle with the suing creditor, and sometimes even if you enter into a settlement without even being sued. You might even have a judgment lien on your home without you knowing that you were sued.
Judgment liens are dangerous for various reasons, eating up equity in your home, potentially jeopardizing its refinance or sale, and hurting your credit. But most dangerous, in many situations the judgment creditor can execute on its judgment lien, resulting in a forced sale of your home to pay the judgment debt.
Judgment Lien “Avoidance” in Bankruptcy
Such a forced sale can be prevented by filing bankruptcy, and in many situations the judgment lien can be gotten rid of forever through the judgment lien “avoidance” procedure. (See Section 522(f) of the Bankruptcy Code).
Be aware how unusual this is, even for bankruptcy. Of course bankruptcy gets rid of debts, but usually it doesn’t get rid of liens. Most conventional kinds of liens—like a vehicle lender’s lien on your vehicle’s title, or your home mortgage holder’s first mortgage on your home’s title—stay on those titles in spite of filing bankruptcy.
So Why Can Judgment Liens Be Removed in Bankruptcy?
Decades ago Congress decided that people’s rights to their homes under certain circumstances should come ahead of creditors’ rights under judgment liens. 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 attached to your home.
The Conditions for Judgment Liens “Avoidance”
The conditions have to be right to get rid of the judgment lien. This “avoidance” power is limited to judgment liens which “impair” your “homestead exemption.” To explain, here are the conditions that must be met:
- The real estate to which the judgment lien has attached must be your “homestead,” which generally just means it’s where you live.
- That home has to qualify for a “homestead exemption.” State and federal laws provide a certain amount of protection in your home, usually described as a certain dollar amount of equity in a home.
- The lien to be “avoided” can’t just be any kind of lien but must 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.”
- This “judicial lien” can’t be for child or spousal support, or for a mortgage foreclosure.
- The judgment lien at issue must “impair” the homestead exemption, which generally means that it cuts into the equity protected by the applicable homestead exemption.
These conditions are usually not that hard to meet. Most people filing bankruptcy who own the home they live in qualify for a homestead exemption, don’t have huge amounts of equity in their homes, and their judgment lien cuts into their protected equity.
Here’s a simple example. Say you own a home with $20,000 of equity (it’s worth that much more than your mortgage), are entitled to a $30,000 homestead exemption, and have a judgment lien against you and the home for $15,000. All of your equity is protected by the homestead exemption because the amount of equity is less than the maximum protected amount. The judgment lien all cuts into that protected equity. So it can be “avoided”—gotten rid of—through bankruptcy.