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Bankruptcy in Brief              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 his assets.  

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 discharge only discharges the personal liability of the debtor, not the liability of property that is subject to a pre petition lien.

So, what liens can be avoided and under what conditions?

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. 

 
The Power of 13.     Stripping off statutory liens & voluntary liens in Chapter 13 Measuring the lien

    Does the lien "impair" the exemption?

    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 Chapter 13.

        A lien 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. 

        A lien that is avoided is forever void and of no effect so long as the debtor completes the case and gets a discharge.

Is the lien a non possessory, non purchase money security  interest?

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 borrowers.  

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

[ Exemption choices ] [ Non exempt property ] [ Avoiding liens ]

          7/1/07