Liens in Bankruptcy and How to Eliminate Liens

During a Chapter 7 bankruptcy, certain liens may be able to be eliminated. If a lien is eliminated or “avoided”, then you get to keep the property that once was secured by the lien. You would keep the property free and clear of any debt meaning that you would pay nothing else to the creditor. In order to avoid a lien you must be able to claim an exemption in the property that is impaired by the existence of the lien. That means that the lien deprives you of your right to benefit from the exemption because you cannot sell the property without paying off the lien.

There are two types of liens: 1) judicial liens, and 2)lien placed on property that you already have where you agreed to have a lien placed on your property in exchange for a personal loan. The first type of lien, a judicial lien, can be avoided on any type of property including real property to the extent that the lien impairs an exemption. The second type of lien however, a nonpurchase money lien, may only be avoided on certain types of real property.

Lien avoidance actions can be a pretty simple process. Most of the time the lienholder does not contest the motion, so then the paper trail just needs to be correct. However, occasionally a lien holder will object which will result in one or more court hearings depending on the type of objection that the lienholder has.

Judicial liens happen after a number of events have occurred:

  1. You have been sued by a creditor for money and lost the lawsuit
  2. The judgment creditor who won the lawsuit obtains a judgment against you for a sum of money
  3. The judgment is recorded against your property in the form of a lien

Most frequently, the judicial lien is recorded and imposed against real estate but judicial liens can also be imposed against business assets. Judicial liens are typically not attached to personal property because there are no procedures to do this and also because ownership of personal property is rarely recorded in public documents.

Nonpurchase money liens can only be avoided on certain types of property. This is typically household goods that are protected by exemption without regard to equity. Liens cannot be avoided against motor vehicles which is a common type of non purchase money lien commonly known as a title loan.