A major source of confusion among people who file for bankruptcy is whether debts on which there is a judgment or lien can be removed (or discharged) in a bankruptcy case.
Yes, they can. If certain criteria are met.
Part of the confusion comes from misuse of the the terms “judgment”, “lien”, and “discharge”.
Whether a debt is dischargeable or not depends on the type of debt it is, and how it was incurred. For example, debts incurred through fraud are not dischargeable.
Neither are certain tax debts, domestic support obligations, or student loans. Which debts are dischargeable in bankruptcy?
Did My Bankruptcy Discharge The Judgment?
Most likely, if the judgment was for a debt not excepted from discharge (see above), you were discharged from the debt. The discharge does not, however, remove any lien against property that may have been created from the Judgment.
A Judgment Is Not A Lien, But A Lien Can Be Created From A Judgment
A judgment and a lien are not the same thing.
A lien is a legal right to get paid from a specific asset/property, as opposed to from an individual person.
A judgment, however, is merely a court order that allows a creditor to pursue collection actions against someone (including creating a lien against assets).
Depending on the laws of the state involved, such collection actions can include getting a lien against property, or wage garnishment, or seizures of bank accounts, etc.
But as far as discharge in bankruptcy goes, a debt on a judgment is no different than any other debt that doesn’t yet have a judgment–they are dischargeable in bankruptcy unless they meet one of the exceptions set forth in 11 U.S.C. 523, as described above.
Liens Remain Against Property After Bankruptcy Unless Removed
A “judgment lien”** is simply a lien that results from recording a judgment, as described above (as opposed to a lien created voluntarily, such as a mortgage).
A judgment lien is not automatic.
First, the creditor must obtain a judgment from the court.
Then, to create a lien, it must be perfected under applicable non-bankruptcy law (usually the state or county in which the asset is located). For real estate, this usually involves obtaining a certified abstract of the judgment from the court that issued it, and recording it with the county recorder’s office wherever the property is located that the creditor wants the lien to attach.
This lien will remain against whatever property it is “attached” to on the date the bankruptcy case is filed after the bankruptcy discharge has been entered, unless it is specifically avoided (removed) in the bankruptcy case.
Why? Because the bankruptcy discharge only eliminates the debtor’s personal liability on the debt.
It does not affect any property’s liability on a debt.
Sometimes Judgment Liens Can Be Removed in Bankruptcy
So, can one remove (avoid) a judgment lien in a bankruptcy case?
Yes, if certain requirements are met.
The bankruptcy code section that states this is 11 U.S.C. 522(f), which allows a lien to be removed “to the extent that it impairs an exemption to which the debtor would have been entitled in the absence of the lien.”
This is basically a mathematical calculation. It depends on:
- the value of the asset;
- the amount of all other liens against the property, and; See More On Bankruptcy Exemptions
- the amount of the available exemptions (usually governed by the laws of the State where the bankruptcy case is filed, but not always), as well as when the lien attached to the property.
How does it work?
It can get tricky, but to take a very simple example:
- House is worth: $500,000
- 1st (and only) mortgage: $490,000
- Judgment Lien: $60,000
- Homestead Exemption available: $75,000
In this example, the lien would be fully avoidable because the lien completely impairs the $75,000 homestead exemption.
There are many more complicated scenarios, involving multiple judgment liens, or just different numbers on the senior liens that can make these calculations tricky.
It is important to know whether or not a lien has attached to real estate property so steps can be taken to remove that lien, if possible. See How To Conduct a Property Lien Search On Your House
for information on finding out if liens exist against your property.
The bottom line is that if you have a creditor who has obtained a judgment lien against you, you need to consult with an experienced bankruptcy attorney so they can determine if it can be removed in your case. The lien can also be removed after your bankruptcy case is over, but there are limits and it requires additional legal fees to reopen your bankruptcy case.
** A judgment lien is an involuntary lien. This is distinguished from a voluntary, or consensual lien such as a mortgage or a security interest granted to purchase a vehicle. The lien avoidance procedure referenced above only deals with involuntary judicial liens.
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