a service of the Moran Law Group
Avoiding liens in bankruptcy
One of the most powerful tools for achieving a truly fresh start in
bankruptcy is the debtor's power to avoid
certain liens on
The power to avoid liens modifies the general bankruptcy rule that
liens pass through bankruptcy unaffected by the
discharge: that is, unless liens are avoided, the
discharges the personal liability of the
debtor, not the liability of property that is subject to a pre petition
So, what liens can be avoided and under what
Liens that impair exemptions
Liens that attach to assets that the debtor is
entitled to claim as exempt
can be avoided to the extent the lien impairs (or eats into) the value
of the exemption in both Chapter 13 and Chapter 7.
What is exempt
To be avoidable, the lien must be a judicial
lien (like a judgment or a garnishment), or a non
possessory, nonpurchase money security interest in household goods
or tools of the trade.
Tax liens ( which are statutory liens, not judicial
liens) aren't avoidable in Chapter 7 even
if they impair exemptions; tax liens can be avoided in
Chapter 13 to the extent the lien is greater
than the asset's value.
Power of 13.
Stripping off statutory liens & voluntary
liens in Chapter 13
Measuring the lien
Example: Home worth
$225,000 is subject to a mortgage of $175,000; a homestead
exemption of $50,000; and a judgment lien of $65,000. Since there
is not enough equity in the home, after allowing for the consensual
mortgage, to pay both the judgment lien and the exemption, the
lien impairs the exemption, and can be avoided in either Chapter 7 or
may be avoided in part. That is, it is avoided only to the extent necessary
to assure the debtor the full value of the exemption. In the example
above, if the house was worth $250,000, the mortgage was $175,000
and the homestead $50,000, the lien would be reduced to $25,000
and $40,000 of the lien is avoided.
lien that is avoided is forever void and of no effect so long as the
debtor completes the case and gets a discharge.
This cumbersome phrase describes the typical
finance company lien in which the borrower pledges his household goods,
appliances, jewelry, etc. to the lender. These liens are taken
by the lender, not because those items have enough value to
repay the loan, but because the threatened loss of those items terrorizes
These liens can be avoided if the lien attaches
to household goods, clothing, jewelry, pets, and musical instruments,
tools of the trade or professionally prescribed health aids.
To avoid a lien, the debtor must file a motion
setting forth all of the statutory elements that entitle him to avoid
the lien and serve the motion on the creditor whose lien is to
be avoided. 11 U.S.C. 522(f).
Avoiding the involuntary
transfer of property in which the debtor could have claimed an exemption
The bankruptcy code takes the idea of assuring
the debtor of the right to exempt property a step further and allows
the debtor to recover property that a creditor has taken possession
of by garnishment, for example, before the bankruptcy is filed.
If the debtor could have claimed that property
exempt if it had not been garnished and the transfer took place within
90 days of the bankruptcy filing, the debtor can sue in the bankruptcy
court to recover the property. 11 U.S.C. 522(h).
Dealing with secured claims that aren't avoidable
in Chapter 7