The Extraordinary Tools of Bankruptcy: Undoing Judgment Liens
Bankruptcy doesn’t just write off debts. It can undo bad things that a creditor has done to you. Like a judgment lien on your home.
A creditor’s judgment against you usually results in a lien in the amount of the judgment against your home, if you own or are buying a home.
The Dangers of a Judgment Lien
A lien secures a debt that you owe a creditor with something you own. A judgment lien is a lien which, in most states, attaches to your home whenever a judgment is entered against you in a lawsuit.
A judgment lien gives the creditor a huge amount of leverage to make you to pay the entire debt—plus the creditor’s attorney fees, its other costs for getting the judgment against you, and ongoing interest. If you try to sell or refinance your home, because of the judgment lien on the title, that debt has to be paid—usually in full—out of money you would have otherwise received. The judgment lien may even prevent you from being able to do the sale or the refinance altogether. Also, sometimes the judgment lien can enable the creditor to foreclose on your home, forcing you to pay off the debt in order to save the home.
You May Have a Judgment Lien without Knowing It
Usually you know when you’ve been sued by a creditor. You receive papers that make that clear. But sometimes you are not personally served and don’t know about the lawsuit, or you receive papers but don’t read them closely, or you read them but don’t find out about the consequences.
If you don’t respond within the relatively short time stated in the papers you receive, you lose the lawsuit by default and a judgment is entered against you for the amount that the creditor asked for. A judgment lien is then imposed on your home in that amount. Even if you are paying attention, you are not necessarily informed that a judgment has been entered, nor that your home now has a lien on it in the amount of the judgment.
Even if you have worked out a settlement with a creditor, agreeing to make monthly payments, the creditor often still enters a judgment in case you do not make the payments as agreed. Such settlements can be entered into either with or without a lawsuit. So, even with a settlement, you could easily have a judgment lien on your home.
The Benefits of Bankruptcy
Filing bankruptcy—either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts”—gives you three distinct benefits:
1. It will stop the creditor from enforcing the judgment by garnishing your paychecks and using other collection methods, and also stop it from enforcing the judgment lien itself by foreclosing on your home.
2. Most of the time bankruptcy will result in the discharge (legal write-off) of the debt.
3. In many situations the judgment lien itself can be gotten rid of forever through the judgment lien “avoidance” procedure. The rest of this blog post focuses on this important procedure.
Judgment Lien “Avoidance” in Bankruptcy
The avoidance of a judgment lien is quite an extraordinary procedure. Bankruptcy generally only discharges debts—the money that you owe. It does not get rid of liens, the creditors’ property right in collateral.
Think about conventional kinds of liens, like your vehicle loan lender’s lien on your vehicle’s title. Because of this lien you must either continue making payments to keep your vehicle until the debt is satisfied and the lien is released, or else you must surrender the vehicle to the creditor.
So Why Can Judgment Liens Be “Avoided” in Bankruptcy?
Why are judgment liens any different?
They are not, except judgment liens can be “avoided”—undone—in bankruptcy in a very specific circumstance. The circumstance is if a judgment lien gets in the way of a homestead exemption. (A homestead exemption is the amount of value or equity in a home that you are allowed to shelter from your creditors.)
Congress has simply decided that a person’s homestead exemption should come ahead of a creditor’s rights under a judgment lien. As explained below, this happens when a judgment lien “impairs” your homestead exemption.
The Conditions for Judgment Liens “Avoidance” in Bankruptcy:
- The real estate to which the judgment lien has attached is your “homestead,” entitling you to the exemption.
- That lien 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” cannot 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.
Your Attorney Must File a Motion to “Avoid” the Judgment Lien
Judgment lien “avoidance” requires a specific legal procedure, usually a motion filed by your attorney. Otherwise the judgment lien will continue to attach to your home.
The motion must be filed at bankruptcy court while your case is open. Otherwise, your case would have to be reopened, costing hundreds of dollars more in court fees.