A lien is a type of security interest that a creditor may place on an item of property, either real or personal. The lien allows the creditor to obtain possession of the property if the debtor has been unable to keep up with payments. Liens are usually implemented in situations involving loans for real property such as a home or condo.
Most liens arise through an express contract between the debtor and the creditor. That is, the debtor agrees to grant the creditor possession of their property for the purposes of fulfilling the debt obligation in the event that the debtor fails to pay off the debt. Liens can also arise through operation of law, or through a court order (judicial lien).
Liens can attach to several different types of property:
- Real estate: A judgment lien can also be applied to any real estate you own in the county where the lien is recorded or the judgment is entered.
- Personal property: In many states, a judgment lien can also be applied to your personal property However, a judgment lien on personal property is somewhat ineffective in that personal property has no title to evidence ownership as does a car or house. This means that the personal property could easily be sold to a third party who has no idea that the lien existed.
- Vehicles: A judgment creditor can also file a judgment with your state’s DMV to get a judgment lien on any car, truck, motorcycle, or other motor vehicle that you own. You may not know about this type of lien unless you check with the DMV or if the creditor files a proof of claim in your bankruptcy case, describing its interest as “secured.”
Filing for Chapter 7 Bankruptcy is a common way for persons to remove some or all of their debt. This is because filing for Chapter 7 bankruptcy often allows a person’s debts to be “discharged”, or forgiven.
Under Chapter 7 bankruptcy laws, not all debts may be discharged; however, certain types of liens may be dischargeable. Thus, “Chapter 7 Lien Avoidance” refers to the process by which a lien may be discharged in connection with a chapter 7 bankruptcy filing. Lien avoidance allows the lien to be “lifted” from the property, with the result that the debtor retains possession of the property in question.
The most common type of lien that is discharged under Chapter 7 is a judicial lien. A judicial lien is a lien that arises through a court order issued by a judge. In order to have a judicial lien discharged, the person filing for bankruptcy must also file a “Motion to Avoid Judicial Lien” when filing their bankruptcy papers. There are various eligibility requirements for this motion, which may vary by region.
Another type of lien that can be dismissed through a Chapter 7 bankruptcy proceeding are liens for “non-possessory, non-purchase” money interests in household items or tools related to certain trades. These are specific property items that are of interest to the creditor due to their unique nature, rather than their connection with debt satisfaction.
Liens usually survive Chapter 7 bankruptcy and if you stop making payments on a secured debt after bankruptcy, the lender can repossess the collateral. The lender cannot due you for the deficiency because your personal obligation for the debt that is owed was discharged in the bankruptcy.
A secured debt is treated in two different ways in Chapter 7 bankruptcy:
- Your personal liability for the debt is wiped out in the bankruptcy if the debt qualified for the bankruptcy discharge. This means that the creditor cannot sue you in order to collect the debt after the discharge has been granted.
- The creditor’s legal claim on the collateral or lien on the property does not get wiped out. This means that the lien gives the creditor right to repossess the property and force a sale in order to pay off the debt owed. A lien sticks with the property even through bankruptcy.
Besides obtaining Chapter 7 Judicial Lien avoidance, there are a few other ways to avoid a lien:
- Surrendering the property: This is where the property is surrendered to the debtor, who then usually has 30 days to claim the property. If the creditor doesn’t claim it, the property will be listed as “abandoned”, and will be free of any liens or other debt. While this is a common way to avoid a lien, the property owner should be prepared to lose their property.
- Redemption: Redemption allows the debtor to pay the entire worth of the property, which may be different from the overall debt owed to the lender. This can only be invoked in certain situations, namely consumer loans and not business loans.
Again, these options involve the risk that the debtor might lose their property. However, lien avoidance may often have better credit consequences than simply allowing the lien to be imposed on the property.
Lien disputes can usually be resolved by examining a contract that may have been formed between the debtor and the creditor. The lien agreement will list important information such as dates, the parties to the agreement, and the conditions for enforcing the lien.
If the lien in dispute is a judicial lien, this may require further hearings to determine whether the person is eligible for chapter 7 lien avoidance. This can involve submitting additional evidence like property documents, tax documents, and bank statements.
Chapter 7 Lien Avoidance laws have recently been subject to many changes in light of the current economic conditions. If you need assistance with chapter 7 lien avoidance, you may wish to contact a bankruptcy lawyer in your area. A qualified attorney will be able to help you file the required motions and forms for lien avoidance, and can assist you in preparing the necessary documents. Also, if you have a private dispute, your lawyer can represent you during the formal lawsuit proceedings.