Friday, June 8, 2012

My creditor has placed a lien on my house. Will the lien be discharged in bankruptcy?

When a debtor files for bankruptcy and receives a discharge, the Order Discharging Debtor will absolve the debtor of all dischargeable debts, and bar creditors from collecting those debts from the debtor in the future.

However, certain creditors can file a lien against property (usually real property) to ensure that their loan is paid. If your creditors have recorded liens against your property, the discharge order will not automatically discharge those liens. In certain cases, it is possible to avoid the lien (i.e., strip off the lien), but your bankruptcy attorney must file a motion to do so. Certain liens are not avoidable, such as liens given with your consent and tax liens) and will remain on the property. The most common example of an unavoidable lien is your typical mortgage.

Most people are familiar with the legal relationship between a borrower and a lender in the context of a mortgage – a bank lends money to someone wishing to purchase a home, and in exchange for the loan and the borrower’s promise to repay the debt, the lender places a lien against the property granting them certain rights, including the right to foreclose if the debtor does not honor the terms of the borrower’s obligation to repay. This arrangement protects the lender by giving them legal recourse against the collateral, so that they can recoup all or a portion of their loan if the borrower fails to pay.

A lien arising out of a mortgage is not avoidable because it is “voluntary”. Here, the borrower allowed the lender to place a lien on his or her property (or pledged some other collateral) in exchange for something of value, such as a loan. Voluntary liens are not avoidable in bankruptcy pursuant to the U.S. Bankruptcy Code. Although the borrower can never pursue the discharged debtor for any deficiency, in order to pass clear title to the property upon sale, the lien must either be paid by the new buyer or discharged (i.e., forgiven) by the lender.

In addition, liens placed against property by government institutions for taxes are not avoidable in bankruptcy.

In certain cases, however, a creditor may have obtained a lien against your property against your will. The most common is a judicial lien, in which a creditor has taken you to Court for an unpaid debt, obtained a judgment in their favor, and requested a sheriff to “execute” that judgment against your property. A copy of the judgment would be recorded in the registry of deeds in your county against your property. As before, even if the underlying debt is discharged in bankruptcy, the lien obtained by the creditor remains in place. The debt does not have to be repaid by virtue of the discharge, but the lien will continue to cloud the title to the property, making a future sale difficult or impossible if the lien is not paid at closing.

11 U.S.C. § 522(f) permits a debtor to remove liens based on a legal judgment of a nonpriority creditor – to the extent the lien encumbers the value of the debtor’s exemption(s) in the property. Put another way, if the value of the debtor’s equity in the property would be exempt even without the encumbering lien, a court, on motion of the debtor, may avoid the lien, effectively stripping it from the title history of the property.

The procedure for avoiding a judicial lien varies from state to state, and must be made by motion to the court. If any of your creditors have obtained a legal judgment against you, and recorded that judgment as a lien against your property, simply filing for bankruptcy isn’t enough. Ensure that your bankruptcy attorney is aware of the existence of the lien, and they will be able to advise you as to whether it can be avoided, and if so, file the appropriate motion with the Court.

Tuesday, June 5, 2012

Learning to Fly and Bankruptcy Exemptions

I would like to lean to fly. Not in a superman sense – in a “small aircraft” sense. As the first step in achieving that goal, this past weekend, I took a flying lesson and had a great time. When I was done, I was mulling over the legal ramifications of aircraft ownership, and as my legal mind started to wander, I pondered how the ownership of an aircraft would be handled in a bankruptcy. While this may not be where your mind would have wandered, consider it an occupational hazard of being a bankruptcy attorney. I don’t want you to get the wrong impression, but when you are a bankruptcy attorney, you sometimes can’t help but look at the world through a proverbial “bankruptcy filter”.

Since not everyone wants, or owns, an airplane, writing an answer to “how would a small aircraft be treated in bankruptcy” might seem somewhat superfluous. In fact, the rest of the people in my office would no sooner get into a small plane as they would shave their head. But what occurred to me is that nearly everyone has their “learning to fly.”

In good financial times, most of us purchase “toys” or other items that support our hobbies, but what happens when the same folks may be facing bankruptcy? If selling the toys and paying the debt is not an option, how are these items treated in bankruptcy? The “toys” could be anything: aircraft, boats, motorcycles, or classic cars. Maybe motors aren’t your thing, but you have a nice collection of high-end computers and electronics. If you spend your Sundays working in a wood shop, woodworking equipment or other tools might be your “toys”.

How are these hobby items treated in bankruptcy?

Like any other asset, the item you seek to protect must be disclosed to the bankruptcy court (along with all other assets) and are subject to acquisition by the trustee if they are not exempt under the Federal or Massachusetts exemptions. There are a number of exemptions that may be used to establish the exemptability of items. Ultimately, the amount of the allowable exemptions may be affected by the debtor’s desire to exempt other personal property, but generally speaking, the following exemptions are available to protect a debtor’s items which do not fall into a specific exemption category (such as jewelry, certain religious articles or motor vehicles, which are discussed later on):

Federal Exemptions:

11 U.S.C. § 522(d)(5): $1,150.00, which is federal catch-all exemption and may be applied to any personal property owned by the debtor;

11 U.S.C. § 522(d)(5): Up to $10,825.00 of unused home equity not already exempted under 11 U.S.C. § 522(d)(1);

11 U.S.C. § 522(d)(6): $2,175.00 for tools and equipment used in business. For this exemption to be applicable to the debtor, the debtor must establish that the items are necessary for the debtor’s trade, employment or business.

Massachusetts Exemptions

A debtor filing for bankruptcy in Massachusetts may elect either the Federal exemptions or the Massachusetts exemptions. Massachusetts exemptions applicable to firearms ownership are as follows:

M.G.L. c. 235 § 34(5): $5,000.00 for tools and equipment used in business. Like the federal exemptions, for this exemption to be applicable to the debtor, the debtor must establish that the items are necessary for the debtor’s trade, employment or business. Therefore, if the items are used in the debtor’s business or money-making efforts, they may be exempt up to $5,000.00, regardless of their less intrinsic value as hobby items to the debtor.

M.G.L. c. 235 § 34(17): Up to $6,000.00, representing the debtor’s aggregate interest in any personal property, not to exceed $1,000 in value, plus up to $5,000 of any unused dollar amount of the aggregate exemptions provided for the exemption of household furnishings, tools of the trade and a motor vehicle.

Special Considerations for Motor Vehicles

In Massachusetts, you can exempt up to $7,500 in equity in one car or other vehicle that you use for personal transportation or to find or maintain employment. If you are 60 years of age or older, or if you are disabled, you can exempt up to $15,000. If you decide to use the federal bankruptcy exemptions, you can exempt up to $3,450 of equity in your motor vehicle. The law does not care if your one primary vehicle is a 2005 Honda Civic, a 2012 Harley-Davidson Dyna Super Glide or a 1969 Yenko Camaro; only the amount of the debtor’s equity in the vehicle matters.

If the item you seek to protect is a registered motor vehicle, but not your primary mode of transportation, some trustees will disallow an exemption claimed under either the federal or Massachusetts “motor vehicle” exemptions. Additionally, although the Massachusetts exemption laws specifically state “automobile”, many trustees will not object to the debtor’s attempt to discharge a motorcycle if it is your primary mode of transpiration.

So, what does this all mean?

It means that the answer to the original question is “it depends”. The ability to exempt hobby items largely turns on the value of the item, and the other expemptions already claimed by the debtor for such necessities as their home, household goods and furnishings, or employment-related tools. In a “perfect storm” of circumstances, you may be able to exempt upwards of $20,000 of equity in your “toys”, but the real value depends on the totality of circumstances in your bankruptcy case.

If you are facing bankruptcy and have personal and other property, such as a home and retirement accounts that you want to ensure is protected through the bankruptcy process, contact Attorney Matthew P. Trask to learn more about how to protect your assets and find your financial freedom.

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