Chapter 7 Lien Avoidance

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 What is a Lien?

In general, a lien is a type of legal document that gives a creditor the right to claim a debtor’s property in the event that they default on their loan or debt payments. A lien helps to ensure that the borrower will eventually pay off their debt, or else they will risk losing that property to the creditor or lender. There are several different types of liens, but one of them in particular stands out when it comes to filing for bankruptcy. 

A Chapter 7 Bankruptcy lien, more commonly referred to as a judgment lien, is a lien that attaches to a debtor’s property after a creditor or lender files a lawsuit and obtains a money judgment against them. The creditor or lender can then use that lien to take the debtor’s property in order to satisfy the money judgment.

For example, suppose you owe $50,000 to your credit card company and have fallen behind on payments. Your credit card company can sue you in court for those missing payments. If your credit card company prevails, then the court may issue a money judgment against you. The creditor can then either record the money judgement against your property, or use it to deduct funds from your bank account or paycheck. 

If the creditor perfects and attaches the lien to your home, then they will be able to collect any money you receive if you try to sell it later on. 

What Types of Property Does a Lien Attach to?

A lien can attach to various types of property. Depending on the kind of lien, a lien can attach to either real property, personal property, or both. Real property refers to things, such as houses, buildings, and plots of land. 

For example, when a borrower takes out a loan against their home, the lender may place a lien on the property. If the borrower defaults on their loan payments, then the lender can repossess their home for nonpayment of the loan and as a way to recoup their losses.

Personal property, on the other hand, includes items like appliances, cars, fine jewelry, and furniture. So, for instance, if a debtor fails to make payments on a car loan, then the lender can repossess the car in order to pay off the remaining debt. 

However, if for some reason repossessing the car does not satisfy the full balance, then the debtor will be responsible for paying off the rest of that balance.  

What is Chapter 7 Lien Avoidance?

As previously mentioned, a creditor who obtains a money judgment against a debtor will be allowed to repossess the debtor’s property and sell it to satisfy the money judgment. A debtor who files for Chapter 7 Bankruptcy may be able to avoid a money judgment lien by filing a Motion to Avoid Chapter 7 Lien in a federal bankruptcy court. 

A Motion to Avoid Chapter 7 Lien is a type of legal document that essentially asks the court to remove a judgment lien from the debtor’s property. To be successful, the debtor must show that there is a judgment lien against them as a result of a money judgment, that the property in question could be exempted in bankruptcy proceedings, and that the lien would decrease the amount they could have exempted. 

It should be noted, however, that the above requirements may vary by jurisdiction. Additionally, depending on a state’s bankruptcy property exemptions, judgment liens can either be avoided in part or in full. Thus, to find out exact requirements, a debtor should review local bankruptcy rules and speak to a local bankruptcy lawyer for further legal advice.  

What Happens to Liens in Chapter 7 Bankruptcy?

Filing for Chapter 7 Bankruptcy will not remove a lien, but it can help a debtor to avoid one and to get rid of personal liability. For example, if the debtor’s personal liability was wiped out due to a bankruptcy discharge, then this means that the creditor will no longer be allowed to sue them for payment because the debt was discharged. 

However, a lien still permits the creditor to repossess the property that the lien is against and to sell it if the debtor does not repay them. This is because bankruptcy does not remove a lien unless the debtor files for lien avoidance. Also, if the property is unavailable for some reason, the creditor may still sue the debtor for its value. 

For example, suppose a debtor uses their credit card to purchase a washing machine for their home. Upon purchasing the washing machine, the debtor signs a contract promising to pay for the appliance over the next 18 months or else the creditor can repossess it. If the debtor fails to pay and files for bankruptcy, they will no longer be liable to pay for the washing machine, but the creditor may take back the appliance if that payment is never made.

What are Some Other Ways to Obtain Lien Avoidance?

Aside from filing for Chapter 7 Lien Avoidance, some other ways to avoid a lien or lien liability include:

  • Satisfying the debt: If the debtor is able to pay off their debt in full, they should do so immediately since this can remove the lien.
  • Requesting redemption: The amount of debt owed to the lender may be different than the actual value of the property. Redemption allows a debtor to pay the full value of the property and avoid lien liability, even if there is still some remaining balance of debt (e.g., accrued interest). However, it should be noted that this option may only be used in certain situations. 
  • Surrendering the property: If the property is surrendered to the debtor, the debtor will have about 30 days to reclaim the property. Additionally, if a creditor does not claim it within this time period, the property will be listed as “abandoned”, meaning it will be free of any liens or debt. Although this is one of the most common ways to avoid a lien, it is also one of the riskiest. If the creditor claims it, then the debtor can lose their property.

What if I Have a Dispute Over a Lien?

Lien disputes can often be resolved by reviewing the terms of the original contract formed between the debtor and creditor. If such a contract exists, it will typically contain important information about the lien like what conditions must be present to trigger its enforcement. 

However, if the lien dispute is over a judgment lien, then it will require further court hearings to determine whether the debtor is eligible for Chapter 7 Bankruptcy Lien Avoidance. If the debtor qualifies for Chapter 7 Bankruptcy Lien Avoidance, then they must submit certain evidence to the court, such as tax documents, property paperwork, and bank statements.

 As of 2020, the laws on Chapter 7 Lien Avoidance have undergone some changes due to present economic conditions. Therefore, if you have a dispute over a judgment lien or need assistance with the Chapter 7 Lien Avoidance process, you should contact a local bankruptcy lawyer as soon as possible. 

An experienced bankruptcy lawyer can help you file the proper legal documents for a lien dispute or for lien avoidance. Your lawyer can also explain how different outcomes for either type of issue can personally affect you. Additionally, if you need to appear in court, your lawyer can provide representation at the requisite proceedings. 

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