By Ryan C. Wood
If there is a lien on your property there may be a way for you to avoid (remove) the lien when you file for bankruptcy protection. It has to meet certain criteria of course. Only certain liens can be avoided: 1) judicial liens (except for judicial liens that secure domestic support obligations) and 2) non-possessory, non-purchase-money security interest liens. See 11 U.S.C. §522(f)(1).
What is a judicial lien? After a creditor sues you for money owed, you can get a judgment filed against you in several ways: you lose the court case because you really do owe the money or you did not defend the lawsuit (or chose to ignore it) and the creditor wins by default and obtains a default judgment against you. The creditor can then place a judgment lien on your property by recording an abstract of judgment with the county recorder’s office of your county. If there is a lien placed on your property due to a judgment, that lien could be avoided.
What about the non-possessory, non-purchase-money security interest lien? Those are basically any non-consensual liens. If you are not sure about what type of lien was recorded against your property consult a local bankruptcy lawyer in your area. Liens you did not voluntarily place on your property. Examples of a possessory or purchase-money security lien are things like your mortgage and car loans: you voluntarily use your house or your car as collateral to obtain a loan.
Now that you know what types of liens can be avoided on your property your next step is to determine if your bankruptcy attorney can help you avoid the lien. Remember, if there is a lien on your property there may be a way to remove the lien by filing bankruptcy. When filing for bankruptcy protection the lien can be avoided if it impairs an exemption that you are entitled to. 11 U.S.C. §522(f). How do you determine if the lien impairs an exemption? According to 11 U.S.C. §522(f)(2)(A), the lien will impair an exemption to the extent that the sum of the lien, all other liens on the property and the amount of the exemption that you could claim if there were no liens on your property exceed the value of your interest in the property in the absence of any liens.
So what does that even mean? §522(f)(2)(A) is essentially saying that if you add up all your liens plus your exemptions and if it exceeds the fair market value of your property then it impairs an exemption. The best way to explain is to provide you with an example. Let’s say you have a house that is worth $400,000. You have a mortgage on the property for $380,000. You have a $25,000 exemption available for your house. You have a judgment lien on your house for $10,000. Can you avoid this $10,000 lien? Let’s work out the math. If we add up all the liens on the house plus exemptions, we get $415,000 ($380,000 + $10,000 + $25,000). Since the house is worth $400,000, and the mortgage of $380,000 (non-avoidable lien) plus the exemption of $25,000 = $405,000, the entire $10,000 lien would impair your exemptions. In another scenario, if you only have a $370,000 mortgage on your property plus the $25,000 exemption, it totals $395,000. If your house is worth $400,000, then the $10,000 lien would impair an exemption only up to $5,000. This means that you can avoid lien up to $5,000. Depending upon the circumstances, if there is a lien on your property there may be a way to remove the lien when filing bankruptcy.