Bankruptcy can do more than forever discharge your debts. It can undo some bad creditor actions, like a recorded judgment lien on your home.
If a creditor has sued and gotten a judgment against you, it likely now also has a judgment lien against your home. In our last blog post a couple of days ago, we got into how dangerous judgment liens can be. We also explained how you may have a judgment lien on your home and not even know it. Given how dangerous they can be, it’s good that bankruptcy often can destroy judgment liens.
The Benefits of Bankruptcy
Filing bankruptcy gives you four big benefits in dealing with creditor judgments and judgment liens. These benefits apply to both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”
1. Filing bankruptcy stops the creditor from enforcing the judgment itself. It can’t start or continue garnishing your paychecks or using virtually any other methods of collecting the debt.
2. Bankruptcy also stops your creditor from enforcing the judgment lien itself by foreclosing on your home.
3. Most of the time bankruptcy results in the discharge (legal write-off) of the underlying debt.
4. Often the judgment lien itself can be gotten rid of forever through the judgment lien “avoidance” procedure. The rest of this blog post is about this important procedure.
Judgment Lien “Avoidance”
The getting rid of—“avoidance”—of a judgment lien is quite a remarkable procedure. Bankruptcy generally only discharges debts; it doesn’t get rid of liens. Bankruptcy discharges most monetary obligations; it doesn’t usually get rid of creditors’ property rights in collateral.
Consider a vehicle loan lender’s lien on your vehicle’s title. That lienholder’s lien doesn’t go away when you file bankruptcy. Instead you must satisfy the lien. You either continue making payments to keep your vehicle until the debt is satisfied and the lien is released, or deal with the lien through a Chapter 13 “cramdown” by paying off the lien. Or else you surrender the vehicle to the creditor and satisfy the lien that way.
Yet Judgment Liens Can Be “Avoided” in Bankruptcy
Judgment liens are different.
They can be “avoided”—altogether undone—in bankruptcy under certain circumstances that are often not difficult to meet.
Those circumstances involve when a judgment lien “impairs,” or eats into your homestead exemption.
A homestead exemption is a protection from creditors that the law provides for your home. It is usually expressed as a certain dollar amount of home value or home equity.
For example, assume you own a $300,000 home with a $260,000 mortgage, and so the home has $40,000 of equity. Assume also that where you reside you are allowed a $50,000 homestead exemption. That $50,000 protection from the homestead exemption is more than enough to cover the entire $40,000 of home equity.
So if a creditor sued you for $15,000 and got a judgment in that amount, it would likely record a judgment lien on your home also in that same $15,000 amount.
Because you have equity of $40,000, normally that $15,000 judgment lien would eat into that $40,000 of equity. The judgment lien would encumber $15,000 of your home equity, effectively reducing your home equity by $15,000.
But because that $15,000 of equity is protected by your homestead exemption, that judgment lien “impairs” the homestead exemption. As a result the judgment lien can be “avoided”—gotten rid of—through bankruptcy.
The Specific Conditions for Judgment Lien “Avoidance”
To be clear, here are the conditions you must meet:
- The real estate to which the judgment lien has attached is your “homestead,” entitling you to the homestead exemption.
- The lien must be a “judicial lien.” That’s 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.
- As described in the above example, the judgment lien at issue must “impair” the homestead exemption. The lien has to cut into the equity (or home value) protected by the applicable homestead exemption.
Need a Motion to “Avoid” the Judgment Lien
Going through the basic bankruptcy procedure will not of itself get rid of a judgment lien. The “avoidance” requires a legal procedure dedicated specifically for that purpose. It’s usually a motion filed in the bankruptcy court by your bankruptcy lawyer. Otherwise the judgment lien would continue to attach to your home after your bankruptcy case is over.
The “avoidance” procedure needs to be done while your Chapter 7 or 13 case is active and open. Otherwise the closed case would have to be reopened. Assuming that the court allows the reopening, it would cost you hundreds of dollars more in court fees. Obviously it’s important to get it done on time.