One of the important ways that a bankruptcy filing protects a debtor is by giving him the ability to “avoid” judicial liens against his property, a process which cannot be accessed outside of bankruptcy. This process works as follows:
As noted above, a debt owed to an unsecured creditor is discharged through bankruptcy. When the debt is unsecured, that unsecured creditor has no claim upon the real estate or other property of the debtor. If, however, the unsecured creditor files a lawsuit and obtains a judgment and lien against that debtor prior to a bankruptcy filing, that judgment is a lien upon the debtor’s property. All liens against a debtor’s property survive the bankruptcy – unless they are successfully “avoided”.
For example, consider a debtor with a $100,000.00 house and a $90,000.00 mortgage. He has $10,000.00 in equity in his home. If he also owes a credit card lender $10,000.00 and that lender gets a judgment lien against him for that amount, that judgment becomes a lien on the real estate, secondary to the mortgage. Now the debtor has no remaining equity. If the debtor then sold his home for its $100,000.00 value, he would have to pay the mortgage as well as the judgment lien from the proceeds and so would receive nothing at the sale.
If that same debtor filed for bankruptcy prior to the sale of his home, he could file a Motion with the Bankruptcy Court to “avoid” the credit card company’s lien. He is able to do this in order to protect the exemptions which Section 522 of the Bankruptcy Code gives debtors in their property. If a judicial lien – such as one obtained through a lawsuit – impairs one of the exemptions provided by the Bankruptcy Code, a debtor has the right to have that lien avoided – or lifted.
Since the debtor is provided an exemption in his real estate, the lien “impairs” that exemption and it can be avoided. Once the lien is avoided, the debt is now simply an unsecured debt; the lien created by the judgment no longer exists. After having the lien avoided, if the debtor later sold his property for its $100,000.00 value, he would receive the $10,000.00 in equity.
In order to make sure that any liens that can be avoided are addressed, it is important that every debtor give their attorney all possible information concerning any lawsuits which have been filed against him. Often, however, due to stress and other factors, a debtor may not be aware of a lien. A bankruptcy attorney may perform a search of court records as well as the debtor’s credit reports to uncover any judicial liens that would be subject to lien avoidance. The attorney may then file a motion with the court, notify the creditor to allow them to answer the motion, and obtain an order from the Bankruptcy Court avoiding the lien. This order is then presented in the state court where the lien is recorded so that the lien is stricken.
Since liens survive a bankruptcy filing, if the avoidance motion is not timely filed, a debtor may find he is forced to pay a previously unsecured creditor even after his discharge. In certain instances, if the debtor is discharged without the Avoidance Motion being filed, he can request that his case be re-opened to allow for the filing of the motion.
Please contact Robert Manchel, a bankruptcy expert in New Jersey, at 1 (866) 503-5655 to discuss whether you can eliminate judicial liens and seek bankruptcy protection.