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.

10 comments:

  1. This is good information. It is good to know these things before declaring bankruptcy because it might not be the solution for everything.

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  2. can a creditor put a lien on your home after a banckruptcy was discharged and they were discharged? Example I lost my home in a bankruptcy in 2003 I bought a new home now and this old creditor has filed a lein on my new home 9 years later, I only found out because I want to put a roof on my home and they said I had a lien.They were in the original filing and discharged.

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    1. If a debt to a creditor is discharged, then filing of a lien (or any collection action) post-discharge is a violation of the discharge order.

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  3. This one is a good piece of information.When you owe a debt that you cannot afford to pay , the lender may place a lien against some of your properties. Although declaring bankruptcy gives you the right to get rid of your liabilites to your debt , the lien is not attached to you but to the property itself. Your ability to discharge a lien during bankruptcy is limited in scope. If your creditor seizes your home , you may sue in bankruptcy court to recover the property provided the acquisition took place with in a time frame of 90 days of the date you filed your petition . I was just sharing my two cents on this. Thank you so much for sharing this post. I am sure a lot of people find this very useful. Lauren Padilla

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  4. What does it mean when your mortgage company tells you it can not accept your payment due to a motion to release?

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    1. The answer depends on what type of "motion to release" they are referring to. If you are in a bankruptcy, then the "motion to release" likely means they are asking the court for permission to foreclose on your property. You should review your case with an attorney to figure out what they are referring to and what options you might have.

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  5. If you share a mortgage and title with someone on a home and 1 person declares bankruptcy can a lein be placed on the home? If the mortgage is current on payments and in good standing?

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    1. A mortgage typically includes the recording of a security instrument against the home anyway, so a lien would be superfluous.

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  6. I am about to purchase a home for the first time. I filed bankruptcy chapter 7 in 2005 and it was discharged in 2006. The title company has in their notes that I have an abstract judgment against me for a creditor that was discharged back in 2006. I have never owned property so how can they put a lien against me for future property that I do not even own yet? and do I have to pay that debt to purchase this house? I have a copy of the discharge papers showing they were discharged, should this be enough for the title company to know that I do not owe that judgment debt? I live in California, not sure if that matters

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    1. You should consult with an attorney in California.

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