Avoiding Judgment Liens on Your Home – Chapter 7 vs. Chapter 13
Can a bankruptcy filing help you avoid judgment liens on your home’s title?
Chapter 7 (often referred to as “straight” bankruptcy) and other debts related to the home. However, avoiding judgment liens on your home is a common tool that can be used in either Chapter 7 or Chapter 13 bankruptcy cases.
What is a judgment lien?
A lien is a creditor’s legally enforceable interest in your property. A mortgage lien is a consensual, or voluntary, lien on your property to secure payment of the mortgage loan. A judgment lien is an involuntary lien which usually attaches to your home after a judgment is entered against you in a lawsuit. It is a lien on your home’s title which has the legal effect of involuntarily making the home collateral on the judgment debt.
Judgment liens can arise in unexpected ways. Usually you know you’ve been sued and sometimes even if you enter into a settlement without even being sued. You might even have a judgment lien on your home without you knowing that you were sued if the creditor failed to obtain personal service or makes misrepresentations to the court.
Judgment liens eat up equity in your home, potentially jeopardizing its refinance or sale, and payment for the judgment lien holder.
How is a judgment lien “avoided” in bankruptcy?
Such a forced sale can be prevented by filing bankruptcy, and in many situations the judgment lien can be eliminated from the title through the judgment lien “avoidance” procedure under Section 522(f) of the Bankruptcy Code.
You might think that lien avoidance is common place, but commercial laws were written to protect secured lenders. You might think that, of course bankruptcy gets rid of debts, but a bankruptcy discharge usually doesn’t get rid of liens. Most conventional/consensual kinds of liens—like a vehicle lender’s lien on your car title, or your home mortgage holder’s first mortgage on your home’s title—stay on those titles regardless of the bankruptcy discharge.
So Why Can Judgment Liens Be Avoided in Bankruptcy?
Congress decided that consumers’ rights to the value in their homes under certain circumstances should come ahead of creditors’ rights where there is a judgment lien recorded against the title. After all, undoing a judgment lien simply puts the creditor back in the same unsecured position it was in before it sued you and got the judgment lien attached to your home.
What are the conditions necessary for avoiding judgment liens?
The conditions have to be right to avoid a judgment lien. This “avoidance” power is limited to judgment liens which “impair” your “homestead exemption.” Here is a list of the conditions that must be met in order to avoid a judgment lien in either Chapter 7 or Chapter 13:
- The real estate to which the judgment lien has attached must be your “homestead,” which generally just means it’s where you live and is your primary residence.
- That home has to qualify for a “homestead exemption.” State and federal laws provide a certain amount of protection in your home, usually described as a certain dollar amount of equity in a home. In Utah, one title owner can claim a $30,000 homestead exemption; two title owners can claim a $60,000 homestead exemption. There must be equity in the property in order to create the homestead exemption which protects your interest in the equity.
- The lien to be “avoided” can’t just be any kind of lien but must be a “judicial lien” as defined by the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
- This “judicial lien” can’t be for child or spousal support, or for a mortgage foreclosure deficiency.
- The judgment lien at issue must “impair” the homestead exemption, which generally means that it cuts into the equity protected by the applicable homestead exemption.
These conditions are usually not that hard to meet in most bankruptcy cases. Most people filing for bankruptcy relief, who also own the home where they live and qualify for a homestead exemption don’t have huge amounts of equity in their homes. If there is a judgment lien that cuts into their protected equity, the lien can be totally avoided. If there is a judgment lien that is more than the value offered by the exemption protection, the lien can at least be avoided up to the amount that it impairs the value of the exemption.
How would it work for me?
Here’s a simple example. Say you own a home with $20,000 of equity (it’s worth that much more than your mortgage loan balance). You are entitled to a $30,000 homestead exemption, but you have a judgment lien against your home for $15,000. All of your equity is protected by the homestead exemption because the amount of equity is less than the $30,000 maximum amount you can protect with your exemption. All of the judgment lien cuts into that protected equity. Because the judgment lien impairs your homestead exemption, it can be completely “avoided” in either Chapter 7 or Chapter 13.
If you are in financial distress, talk to a bankruptcy lawyer about your situation. It doesn’t mean you’ve committed to file a bankruptcy, but it can’t hurt to find out about your options and to make choices about your financial future with more information that can be relevant to that choice.