Friday, June 8, 2012
My creditor has placed a lien on my house. Will the lien be discharged in bankruptcy?
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.