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The Surprising Benefits: Removing a Judgment Lien on Your Home

May 7th, 2018 at 7:00 am

Bankruptcy usually does not get rid of liens against your assets. However, in many situations you can “avoid” a judgment lien on your home. 


We’re on a series of blog posts about the powerful but less obvious benefits of bankruptcy. Bankruptcy can do much more than just give you immediate and long-term relief from your debts. Today we get into the extremely helpful way bankruptcy can take judgment liens off the title to your home.

The Problem Begging for a Solution

When a creditor sues you, most often it gets a judgment against you. If you do not respond to the lawsuit, the creditor gets a default judgment. That’s a court determination that you owe the debt. The judgment also usually includes substantial fees related to the lawsuit that you then also legally owe.

Even if you do respond, formally or informally, to the lawsuit and work out some kind of deal with the creditor, that deal often includes the creditor getting a judgment against you.

Either way, the creditor’s judgment against you usually results in a judgment lien against your home. That’s often true whether you owned a home at that time or not. For example, if you bought a home years later, a previously entered judgment lien could attach to it. Or if you are buying a home on a contract with the seller, including a rent-to-own, the judgment could attach to your right to the home. Sometimes a new or old judgment lien could even attach to your rights under a residential lease.

Any such judgment lien is separate from the debt you owe to that creditor. Bankruptcy can usually write off (“discharge”) debts but not liens. For example, if you are making payments on a vehicle, bankruptcy can discharge the debt but does not affect the lien that the creditor has on the vehicle. So unless you surrender the vehicle, you have to pay for the right to keep the vehicle. Similarly, bankruptcy may write off the debt that resulted in the judgment, but that could still leave the judgment lien on your home. This is a significant problem because you would likely have to pay to get rid of the lien when you sell or refinance the home.

Judgment Lien “Avoidance”

However, bankruptcy law does have a solution that works in many situations. As long as you meet certain conditions, you can “avoid”—undo—a judgment lien as part of your bankruptcy case. You may well be able to meet these conditions.

The Conditions for Judgment Liens “Avoidance”

You can take a judgment lien off your home by meeting the following conditions:

  • The judgment lien at issue is attached is your “homestead.” That’s the real estate or other property right that the homestead exemption protects for you under the law.
  • That lien must be a “judicial lien.” That’s defined in the U.S. Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • This “judicial lien” cannot be for child or spousal support or for a mortgage foreclosure.
  • The judgment lien must “impair” the homestead exemption. This usually means that the lien cuts into the equity protected by the applicable homestead exemption.  

See Section 522(f)(1)(A) of the  Bankruptcy Code.

Example

Assume the following:

  • You were previously sued by a collection agency on a medical debt for $15,000. You didn’t respond because you knew you owed the debt. So the collection agency got a judgment of $15,000 plus another $2,500 for costs and fees, totaling $17,500. Then a judgment lien in that amount was recorded against your home.
  • You file a Chapter 7 “straight bankruptcy” case. It will discharge—forever write off-the $17,500 debt. But without lien avoidance the judgment lien would survive.
  • You owe a $200,000 mortgage on your home, which is worth $210,000. So you have equity of $10,000. The judgment lien attaches to that $10,000 of equity.
  • In your state you have a $25,000 homestead exemption—protecting the first $25,000 of equity in your home. Since you have less equity than that, the full $10,000 of your equity is protected by your homestead exemption.

The judgment lien “impairs” (or absorbs) the full $10,000 of equity in your home. This equity is all protected by the applicable homestead exemption. Therefore, the judgment lien impairs the homestead exemption.

Because all of the conditions are met in this example, your bankruptcy lawyer could successfully file a motion to “avoid” the judgment lien. You’d permanently be rid of both the $17,500 debt and the judgment lien on your home.

Undoing a Judgment Lien

January 6th, 2017 at 8:00 am

Bankruptcy can do more than forever discharge your debts. It can undo some bad creditor actions, like a recorded judgment lien on your home.


If a creditor has sued and gotten a judgment against you, it likely now also has a judgment lien against your home. In our last blog post a couple of days ago, we got into how dangerous judgment liens can be. We also explained how you may have a judgment lien on your home and not even know it. Given how dangerous they can be, it’s good that bankruptcy often can destroy judgment liens.

The Benefits of Bankruptcy

Filing bankruptcy gives you four big benefits in dealing with creditor judgments and judgment liens. These benefits apply to both kinds of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”

1. Filing bankruptcy stops the creditor from enforcing the judgment itself. It can’t start or continue garnishing your paychecks or using virtually any other methods of collecting the debt.

2. Bankruptcy also stops your creditor from enforcing the judgment lien itself by foreclosing on your home.

3. Most of the time bankruptcy results in the discharge (legal write-off) of the underlying debt.

4. Often the judgment lien itself can be gotten rid of forever through the judgment lien “avoidance” procedure. The rest of this blog post is about this important procedure.

Judgment Lien “Avoidance”

The getting rid of—“avoidance”—of a judgment lien is quite a remarkable procedure. Bankruptcy generally only discharges debts; it doesn’t get rid of liens. Bankruptcy discharges most monetary obligations; it doesn’t usually get rid of creditors’ property rights in collateral.

Consider a vehicle loan lender’s lien on your vehicle’s title. That lienholder’s lien doesn’t go away when you file bankruptcy. Instead you must satisfy the lien. You either continue making payments to keep your vehicle until the debt is satisfied and the lien is released, or deal with the lien through a Chapter 13 “cramdown” by paying off the lien. Or else you surrender the vehicle to the creditor and satisfy the lien that way.

Yet Judgment Liens Can Be “Avoided” in Bankruptcy

Judgment liens are different.

They can be “avoided”—altogether undone—in bankruptcy under certain circumstances that are often not difficult to meet.

Those circumstances involve when a judgment lien “impairs,” or eats into your homestead exemption.

A homestead exemption is a protection from creditors that the law provides for your home. It is usually expressed as a certain dollar amount of home value or home equity.

For example, assume you own a $300,000 home with a $260,000 mortgage, and so the home has $40,000 of equity. Assume also that where you reside you are allowed a $50,000 homestead exemption. That $50,000 protection from the homestead exemption is more than enough to cover the entire $40,000 of home equity.

So if a creditor sued you for $15,000 and got a judgment in that amount, it would likely record a judgment lien on your home also in that same $15,000 amount.

Because you have equity of $40,000, normally that $15,000 judgment lien would eat into that $40,000 of equity. The judgment lien would encumber $15,000 of your home equity, effectively reducing your home equity by $15,000.

But because that $15,000 of equity is protected by your homestead exemption, that judgment lien “impairs” the homestead exemption. As a result the judgment lien can be “avoided”—gotten rid of—through bankruptcy.

The Specific Conditions for Judgment Lien “Avoidance”

To be clear, here are the conditions you must meet:

  • The real estate to which the judgment lien has attached is your “homestead,” entitling you to the homestead exemption.
  • The lien must be a “judicial lien.” That’s defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • This “judicial lien” cannot be for child or spousal support, or for a mortgage foreclosure.
  • As described in the above example, the judgment lien at issue must “impair” the homestead exemption. The lien has to cut into the equity (or home value) protected by the applicable homestead exemption.  

Need a Motion to “Avoid” the Judgment Lien

Going through the basic bankruptcy procedure will not of itself get rid of a judgment lien. The “avoidance” requires a legal procedure dedicated specifically for that purpose. It’s usually a motion filed in the bankruptcy court by your bankruptcy lawyer. Otherwise the judgment lien would continue to attach to your home after your bankruptcy case is over.

The “avoidance” procedure needs to be done while your Chapter 7 or 13 case is active and open. Otherwise the closed case would have to be reopened. Assuming that the court allows the reopening, it would cost you hundreds of dollars more in court fees. Obviously it’s important to get it done on time.

 

Creditors Asking for Relief from Stay NOT to Pursue Collateral

October 10th, 2016 at 7:00 am

Creditors sometimes have good reasons to ask for permission to finish resolving an ongoing dispute outside of bankruptcy court.

 

In our last blog post we talked about the possibility of creditors asking for “relief from the automatic stay.” This phrase refers to a creditor asking the bankruptcy court for permission to pursue a debt or claim in spite of your bankruptcy filing. The “automatic stay” stops creditors from taking collection action against you immediately upon your bankruptcy filing.  In certain limited circumstances a creditor may have legal grounds to ask for an exception to be made to that automatic stay protection.

We referred last time to what is probably the most common situation in which creditors ask for “relief from the automatic stay.” That’s when creditors want to assert their rights against the collateral securing the debt. For example, they want to repossess a vehicle or start a home foreclosure because you aren’t making the monthly payments. They can’t take such action until asking for and getting “relief from stay” from the bankruptcy court.

But there are other reasons—other than to pursue collateral—that creditors ask for “relief from stay.” We’ll cover two of these reasons today, and the rest in our next blog post.

The first two reasons a creditor might ask for relief from stay are to finish a legal proceeding to determine:

  1. whether you are liable on the debt or claim at all
  2. if you are liable for some amount, determining that amount

1. Determining Liability Outside of Bankruptcy Court

Somebody may think you owe money to him or her, but you dispute that claim. You dispute that you owe anything, that you have ANY liability. If that dispute is already being addressed in a lawsuit or in some other forum at the time you file your bankruptcy case, sometimes it makes sense to finish resolving it there. The creditor would have to ask the bankruptcy court for permission to do so.

For example, if your ex-spouse ran up some major credit card charges on a card that had had a $0 balance, you may dispute that you are personally liable on that debt at all. If the cred card company sues you to collect the debt, you may be able to defend that lawsuit on the basis that your ex-spouse owed the debt and you do not.

Such a lawsuit or other proceeding would be stopped by the bankruptcy filing and that would be the end of it. That’s because usually any claim against you would be discharged—legally written off—in the bankruptcy case. The creditor or claimant would receive nothing regardless whether the disputed claim had legal merit or not.

It only makes sense for the creditor to ask for relief from stay to finish the lawsuit if it would financially benefit from doing so. That would happen in two circumstances. If your Chapter 7 case is a rare high-asset-distributing case, your bankruptcy trustee may pay the creditor something on its claim. Or some Chapter 13 cases pay out a large percent to the creditors, making the creditor’s efforts to finish the lawsuit possibly worthwhile.

Otherwise the claimant would receive nothing or very little out of your bankruptcy case. Most claimants know better than to waste their money and their effort by pushing the lawsuit further.

2. Determining the Amount of a Claim

You may be in an ongoing lawsuit in which you admit that you owe some money but the amount is in dispute. The creditor may ask for relief from stay to finish determining the amount you owe in that lawsuit.

For example, you may have been in an accident in which you admit that you were at least partially at fault but there are disputes about what damages you caused and their dollar amounts.

Similar to the first situation above, the creditor may get no benefit from finishing the proceeding. It may make no difference how much you owe. If the debt is going to be discharged completely, without any payment, there’s no point to finishing the lawsuit. So, a creditor would ask for relief from stay to finish determining the amount of the claim only if it would affect how much the creditor will receive.

Again, that would usually be only in the types of Chapter 7 and Chapter 13 cases mentioned above. Otherwise there’s little or no benefit to getting a court determination of the amount you owe.

In both of the above two situations, the bankruptcy court may or may not grant “relief from stay” to finish the lawsuit.  It mostly depends on which court would more efficiently finish resolving the dispute—the original court or the bankruptcy court. 

 

Erasing a Judgment Lien from Your Home’s Title

June 3rd, 2016 at 7:00 am

The potential ability to get rid of judgment liens from your home’s title is an impressive benefit of bankruptcy.

 

Our last blog post was about preventing a creditor from getting a judgment against you, and from getting a judgment lien on your home. Today’s is about erasing a judgment lien from your home after it has already attached.

It’s important: because of how much damage a judgment lien can cause, you can greatly help yourself by filing a bankruptcy case either to stop a judgment lien from attaching to your home or to erase one that has attached earlier.

The Damage Caused by a Judgment Lien

A judgment lien can turn a debt you owe that is unsecured—does not legally attach to anything you own—into a secured debt—secured by what you own, such as your home. So the existence of a judgment lien can take a debt that you can discharge—fully and permanently write off in bankruptcy—into a debt that you must pay in full. And until it is paid, it can haunt you and your home for many years.

Judgment liens are dangerous for lots of reasons. They eat up equity in your home, potentially jeopardize your efforts to refinance or sell it, and seriously hurt your credit. The judgment creditor may even be able to foreclose on its judgment lien, resulting in a forced sale of your home to pay the judgment debt.

Clearly, if you have already been sued, have a judgment against you and a judgment lien on your home’s title, erasing that judgment lien would be a valuable benefit of bankruptcy.

Unusual to Erase a Lien in Bankruptcy

Most kinds of secured debts can’t be turned into unsecured debts in bankruptcy. Most liens cannot be erased. A vehicle lender’s lien on your vehicle’s title, or your home mortgage lender’s mortgage on your home’s title, remain on those titles after bankruptcy. If you want to keep your vehicle or your home, you generally have to agree to keep on paying their debts. The liens don’t go away until the debts are paid off, as long as you choose to keep the vehicle or the home.

This is true not just with voluntary liens such as these, but also many involuntary liens, such as income tax liens. Liens generally survive bankruptcy.

So be aware how unusual it is, even in bankruptcy, to be able to erase a judgment lien.

The Conditions for Erasing—or “Avoiding”—a Judgment Lien

It can only be done under certain circumstances. However, these circumstances apply to a large percentage of people filing bankruptcy who have a judgment lien on their home.

In order to get rid of—“avoid”—a judgment lien, that liens must “impair your homestead exemption.” (See Section 522(f) of the Bankruptcy Code).

Here’s what that means:  

  1. The judgment lien that is being “avoided” must be attached to your “homestead.” That is defined differently in different states but generally refers to the place where you live.
  2. The equity in that homestead must be protected by a “homestead exemption.” State and federal laws provide different amounts of protection for your home, usually described as a certain maximum dollar amount of equity. These amounts vary quite drastically among the states—from about $5,000 of equity to an unlimited amount.
  3. The lien to be “avoided” can’t just be any kind of lien but must be a “judicial lien,” defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  4. To be “avoided” the “judicial lien” can’t be based on child or spousal support, or be for a mortgage foreclosure.
  5. The judgment lien at issue must “impair the homestead exemption,” which generally means that the equity that the judgment lien attaches to is equity that is protected by the applicable homestead exemption. That generally means that without accounting for the judgment lien the amount of equity in the home does not exceed the homestead exemption.

For example, assume your home has equity (before accounting for the judgment lien) of $25,000. Also assume that your state’s homestead exemption is $30,000, so all of the $25,000 of equity would be protected by this homestead exemption. If you’d have a $10,000 judgment lien against your home, all of that $10,000 lien would be eating into that portion of the equity that is protected by the homestead exemption. Since the entire judgment lien “impairs the homestead exemption,” all of that lien can be “avoided”—erased through bankruptcy.

 

Preventing a Judgment Lien against Your Home

June 1st, 2016 at 7:00 am

Letting a creditor get a judgment against you is dangerous, for a lot of reasons. One of the biggest dangers is a judgment lien on your home.  

 

 We just finished a series of 4 blog posts about income tax liens. The first one was about how much better things can be for you if you prevent a tax lien from being recorded against your home by filing a bankruptcy case before that happens.

It’s a similar situation with creditor judgments and the judgment liens they create against your home. You can prevent them from happening and can really help yourself if you do so.

Creditor Judgments Happen Quickly

Let’s get really practical. It’s all too easy to get a judgment against you and a judgment lien against your home.

If you get behind on payments to a creditor, that creditor usually has a right to sue you pretty much right away. Some creditors do. But often they don’t, instead sending your account to a collection agency. And then it’s often sent to a second or third collector until it’s hard to keep track of who is collecting for what. Then when you’re not expecting it—sometimes even years later—you get a lawsuit in the mail or handed to you by a process server.

Then you have only a few days or at most a few weeks to act. The papers you get say you are being sued and that you need to pay the entire balance. You likely don’t have the money being demanded, or any way to get that money. You probably believe that you owe the money anyway so it seems pointless to dispute the lawsuit. Certainly doesn’t seem to make sense to find and pay a lawyer to fight the lawsuit. And it just feels like too much hassle to write up any kind of response to the lawsuit or to respond in any other way.

So when you don’t do anything by the deadline, a “default judgment” is entered against you. That means that essentially the creditor gets what it asked for—for the court to formally confirm that you owe the debt, along with whatever extra charges are requested by the creditor.

You may well not even know that a judgment has been entered against you because often you’re not told.

Collection after Judgment Entered

A judgment is much more than just confirmation that you owe the money that the creditor says you owe. It empowers the creditor to use a list of tools to force you to pay that debt, which is often much, much bigger than you thought because of all the additional charges and fees.

Those creditor tools include actions against you, your income, and your assets. Examples are garnishment of your wages and bank accounts, possible levies on other personal property such as your vehicle, and being ordered to personally go to court to answer questions about your income and assets.

The Judgment Lien on Your Home

A less well known but sometimes even more dangerous creditor tool is the judgment lien. A judgment lien in effect involuntarily turns what you own into collateral securing the judgment amount.

In some states the lien happens automatically upon the court’s entry of the judgment. In other states the creditor has to take the extra step of recording the judgment with the appropriate county or state entity.

In some states a judgment lien applies to both your personal property and your real estate. (“Personal property” is everything you own that isn’t real estate.)  Understandably a judgment lien on your home is the scariest.

Foreclosing on Your Home with a Judgment Lien

Depending on your state’s laws, the amount of the judgment, the amount of equity, and other factors, a judgment lien could result in the forced sale of your home by the creditor to pay the judgment amount.

But not necessarily. In some states your home can’t be sold at all or only if the judgment amount exceeds a certain minimum.

But even if your home isn’t sold by the creditor to pay off the judgment lien, the lien would usually have to be paid off if you ever wanted to sell or refinance your home.

This could jeopardize the sale or refinance altogether—because you thought you had a certain amount of equity in your home but find out that you had less as a result of the judgment lien.

Plus a judgment lien is terrible on your credit score. And it lasts for a long time—usually 7 to 10 years—and usually can be renewed for at least one more such length of time.

Stop a Judgment Lien from Hitting Your Home

If you are sued by a creditor, file a bankruptcy case before your deadline to respond to stop a judgment from being entered. Then the creditor won’t get a judgment lien on your home.

Or at least no judgment can be entered without the bankruptcy court’s permission. Usually the court won’t give permission. That’s especially so if the underlying debt is one that will be discharged—legally written off—in the bankruptcy case.

After that the debt is gone and the creditor can take no further action against you or your property.

Conclusion

By filing bankruptcy you usually avoid having to pay any or at least most of the underlying debt. You avoid having a judgment lien imposed on your home. You avoid having to deal with a judgment lien as you try to sell or refinance the home. And you avoid the risk of losing your home to foreclosure of the judgment lien.

Don’t let a creditor get a judgment against you. See a lawyer to find out about bankruptcy, and then, if appropriate, file a bankruptcy case before a judgment lien can be imposed on your home.

 

Mistakes to Avoid–Prevent Judgment Liens against Your Home

September 4th, 2015 at 7:00 am

Don’t let a creditor get a judgment against you. File a bankruptcy case before that can happen.

 

It’s All Too Easy for a Creditor to Get a Judgment against You

If you are seriously behind on payments to a creditor, you can end up with a court judgment against you and a judgment lien against your home even if you act with what seems like common sense.

Let’s say you’ve fallen behind on a debt because you simply didn’t have the money to pay it. You get some papers in the mail or handed to you saying that you are being sued and that you need to pay the entire balance. You don’t have the money to pay hardly anything and certainly not the full amount. You know you do owe the debt so you see no reason to dispute that you do. So you don’t see any point to paying an attorney to fight the lawsuit. And you don’t see any good coming from contacting the creditor’s attorney yourself or to trying to file any kind of response to the lawsuit.

Then when you don’t do anything by the deadline stated on the papers, a judgment is entered against you. You may well not even know that it’s happened because often you’re not told.

So what? A judgment is just a court document saying you owe the money the creditor says you owe, right?

A Judgment Means a Judgment Lien on Your Home and Any Other Real Estate

A judgment is much more than that. First, it entitles the creditor to take a set of actions against you, your income, and your assets, such as to garnish your wages and bank accounts, and to force you to go to court to answer questions about your income and assets.

Second, a judgment generally results in a judgment lien against any real estate that you own—including your home. Depending on local laws, the amount of the judgment, and other factors, such a judgment lien can result in the forced sale of your home to pay the judgment amount.

We’re focusing today on this second result of judgments, the judgment lien.

Does a Judgment Lien Mean Your Home Must Be Sold to Pay the Lien?

Again, that depends on various factors. In some states your home can’t be sold at all or only if the judgment is of at least a certain amount. But even if your home isn’t sold by the creditor to pay off the judgment lien, if you ever wanted to sell or refinance your home or other real estate, the lien would usually have to be paid off.

That could jeopardize the sale or refinance altogether—because you thought you had a certain amount of equity in your home but find out that you had less as a result of the judgment lien.

Or even if the sale or refinance could still go through in spite of the judgment lien, paying off that judgment lien would reduce the money that would otherwise come to you, or that would pay other liens you really wanted to be paid (such as income tax or child support liens).

The Judgment Lien Can Attach to Your Real Estate Anywhere

Even if you do not own any real estate in the county or state where you were sued, but do somewhere else, the creditor can likely transfer the judgment to wherever your real estate is located. Then the creditor can force payment of the judgment amount through whatever means permitted by the local laws of wherever the real estate is located.

So no matter where you own real estate—your home or any other kind of real estate—a judgment anywhere would likely turn into a judgment lien attached to that real estate.

This Can Hurt You Even If You Don’t Own Any Real Estate

You may figure this this is no problem for you because you don’t own a home, and certainly no other real estate. But be careful. If a parent or grandparent dies, and you and your siblings inherit some real estate, a judgment lien could immediately attach to your share in that real estate. Or if you get married to someone with real estate (including such a partial share), a judgment lien could unexpectedly attach to it.

Preventing a Judgment Lien from Attaching to Your Real Estate

If you are sued by a creditor your filing of a bankruptcy case before your deadline to respond, that will stop the lawsuit before a judgment is entered. Then the creditor cannot continue the lawsuit or enter a judgment without the bankruptcy court’s permission. Usually the creditor cannot get that permission. So no judgment is entered, and no judgment lien is created. Usually the debt that was the purpose of the lawsuit is discharged (legally written off) through the bankruptcy case, which ends the entire problem.

So, by filing bankruptcy you usually avoid having to pay any or at least most of the underlying debt. You avoid having to deal with the judgment lien if you try to sell or refinance the real estate. And you avoid the risk of losing your real estate from its forced sale upon enforcement of the judgment.

 

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