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Archive for the ‘avoiding judgment liens’ tag

A Sample Judgment Lien, Undone

January 9th, 2017 at 8:00 am

Here’s an example showing why a judgment lien on your home is dangerous, and how bankruptcy can solve this problem.   

 

The last two blog posts have been about judgment liens on a home: the trouble they cause and how bankruptcy gets rid of them.

Today we’ll give examples both of judgment lien trouble and of bankruptcy’s solution.

The Trouble Caused by a Judgment Lien

Brent and Sandra Taylor own a $290,000 home with a $250,000 mortgage. They have a lot of other debt. Besides the mortgage they owe mostly medical bills and credit cards—$80,000 and $55,000 of them, respectively, $135,000 altogether.

One collection agency collecting on $20,000 of the medical bills sued them six months ago. Brent and Sandra didn’t respond to the lawsuit. They figured they definitely owed those medical bills and so had no reason to respond or object. Plus they had nothing to offer in settlement, either as a lump sum or in monthly payments.

They didn’t realize that in their state, like in many states, a judgment automatically turns into a judgment lien on real estate owned by the judgment debtor. The collection company recently informed them there was a judgment lien on their home in the amount of $22,500. The extra amount was for the collection agency’s attorney fees and other legal costs, plus ongoing interest.

The Taylors are now getting calls from the collection agency making them believe they’re going to lose their home. They’ve gotten the impression that the judgment lien can be foreclosed on since they have enough equity in the home to cover it. They’ve been pressured to refinance or sell their home. Because of their debts and inadequate equity, they can’t qualify for any refinancing. So they think they have to sell the home.

Their Dilemma

Even if the Taylors would somehow succeed in getting refinancing, they would have to pay off the judgment lien from the refinancing proceeds.  That would just about wipe out their equity.(Again, this makes a refinancing virtually out of the question.)

Or if they would sell their home, the judgment lien would have to be paid in full out of the sale proceeds. That’s because valid judgment liens must be paid before the homeowners get anything from the property.  After paying off the judgment lien and other costs of sale, they would have very little left over to get new housing. Certainly nowhere near enough for the down payment on a home; likely barely enough for a few months of rent.

Brent and Sandra hate the whole idea of selling their home. In their housing market renting would cost more, especially when accounting for the mortgage interest tax deduction. Plus they know it would be many years before they could again qualify for a mortgage, especially with tighter financing standards these days.

Partly Saved by the Homestead Exemption

So they go to see a bankruptcy lawyer. The first thing they learn is that they are entitled to a homestead exemption that provides certain protections for their home equity.

Assume that in their state their homestead exemption amount is $50,000. (These amounts vary widely so you need to find out from an attorney how much you qualify for. Determining this can often be more complicated than you think.)

One protection that $50,000 homestead exemption provides is that the collection agency actually can’t foreclose on the judgment lien. (The collection agency purposely gave Brent and Sandra the wrong impression on this.) The collection agency can’t foreclose because Brent and Sandra have $40,000 in equity ($290,000 home value minus the $250,000 mortgage). All of that $40,000 of equity is protected by the $50,000 homestead exemption.

But that still leaves Brent and Sandra with a judgment lien, increasing over time, which would have to be paid in full whenever they sell the home. And they still also have all the rest of their debts, most of which they are far behind on. Before long will come more lawsuits, and more judgment liens.

Judgment Lien Avoidance

As explained in our last blog post, if the Taylors filed a bankruptcy case, the judgment lien could be “avoided.” It could be completely taken off their home’s title.

That’s because all of that $22,500+ judgment lien “impairs” their homestead exemption. That is, all of the equity that this judgment lien eats into is protected by the Taylor’s $50,000 homestead exemption.

The Good Conclusion

So, if they filed a Chapter 7 “straight bankruptcy” case, most likely Brent and Sandra would be able to discharge (permanently write off) all their $135,000 or so in medical and credit card debts. They would “avoid” the $22,500+ judgment lien so it would be permanently off their home title. Because they want to keep their home they would continue owing and paying their mortgage.

But they would have no other debts, and no judgment lien. Brent and Sandra Taylor would have a fresh financial start.

 

“Avoiding” a Judgment Lien on Your Home in Chapter 13

July 27th, 2016 at 7:00 am

Both Chapter 7 and Chapter 13 can wipe away judgment liens. But doing so under Chapter 13 can be better when used with its other benefits.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 case can help you keep your home. Today we cover the 9th of those 10 ways. Here’s how we introduced this earlier.

9. Judgment Lien “Avoidance”

A judgment lien is put on your home by a creditor who sues and gets a judgment against you. It then records that judgment in the county where your home is located. (Or the creditor uses whatever procedure creates a judgment lien in your state).

In bankruptcy, a judgment lien can be removed from your home under certain circumstances. Essentially, the equity in your home that’s encumbered by the judgment lien must be covered by the applicable homestead exemption. In other words, the judgment lien must “impair” the homestead exemption. If it does, the judgment lien can be removed, or “avoided,” from the title of your home.

Judgment lien “avoidance” is available under Chapter 7 as well as Chapter 13. But Chapter 13 can be better when lien “avoidance” is used in combination with other tools only Chapter 13 provides.

Here’s how this works in practice.

The Example

Assume that you own a home that is worth $200,000. You lost your job 18 months ago and were unemployed for 12 months. As a result you fell 9 payments behind on the $1,200 monthly mortgage payments, a total of $10,800 behind. The full amount owed on the mortgage is $180,000. Your mortgage lender is threatening to foreclose on the home if you don’t quickly catch up on the missed payments.

During your unemployment you also couldn’t make the payments on a credit card with a balance of $7,500. It was sent to collection and the collection company sued you. You didn’t respond to the lawsuit because you knew you owed the money and saw no benefit to objecting. So the collection company got a default judgment against you. The amount of the judgment is $8,750, since the collector could add its costs of the lawsuit to the judgment. The collector then recorded a judgment lien against your home in that amount.

So your $200,000 home in encumbered by the $180,000 mortgage plus the $8,750 judgment. Assume also that you are entitled to a $25,000 homestead exemption.

The Judgment Lien “Avoidance” Here

Under either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts,” this $8,750 judgment lien can be removed from your home’s title.

That’s because the equity in your home that the judgment lien is encumbering is protected by the homestead exemption.

Here’s how the math works. Without the judgment lien, there’s $20,000 in equity in the home—its $200,000 value minus the $180,000 mortgage. The $25,000 homestead exemption would protect up to $25,000 of equity. So, all of the $20,000 in equity is protected. The entire $8,750 judgment lien eats into, or “impairs,” this protected equity. And so the entire judgment lien can be “avoided,” or released from your home’s title through bankruptcy.

The Chapter 7 Possibility

If you filed a Chapter 7 case and “avoided” the judgment lien you would likely also be able to “discharge”—legally write off—that $8,750 credit card debt. The debt would be gone, and the judgment lien would be gone off your home, and the debt itself would be gone forever. Mission accomplished there.

But that still leaves you $10,800 behind on your mortgage. Discharging your other debts may leave you with some available money each month to pay towards this mortgage arrearage. If so, you might be able to make a deal with your home mortgage lender for catching up on the mortgage. If so, go for it.

However, often the amount that you could pay towards the mortgage arrearage would not be enough to satisfy your mortgage lender. Mortgage lenders in this situation often insist on homeowners catching up within 10-12 months. That’s amounts to about $1,080 to $1,200 per month under our facts. And you’d have to pay that on top of the regular ongoing monthly payments of $1,200.

You may simply not have much extra money in your budget even after a Chapter 7 case.  You may not be able to catch up on your mortgage fast enough to satisfy your mortgage lender. If so it wouldn’t do much good to “avoid” the judgment lien on your home only to lose it to a mortgage foreclosure.

The Chapter 13 Advantage

If you and your bankruptcy lawyer instead filed a Chapter 13 case, it could solve this dilemma. Your mortgage lender would be forced to give you MUCH more time to catch up on the mortgage arrearage.

A Chapter 13 payment plan usually lasts from 3 to 5 years. You are generally allowed to push it out the full 5 years in order to reduce how much you would need to pay your mortgage lender monthly.

The payment plan can often be creative by adjusting for anticipated changes in your income or expenses. You may be able to pay less on the mortgage arrearage early in the plan to deal with even more urgent debts. Sometimes you can even pay all or part of the arrearage through a later refinancing or sale of the home.

The bottom line: when you need to “avoid” a judgment lien but also need other benefits that Chapter 13 provides, look closely at that option. Chapter 13 takes much longer but those benefits may make it well worthwhile.

 

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.

 

The Judgment Liens that Can Be “Avoided” from Your Home’s Title

February 1st, 2016 at 8:00 am

Bankruptcy can’t get rid of most creditor liens on what you own. But judgment liens on your home are an exception.

 

Our last blog post was about judgment liens, why they are so dangerous, and how both Chapter 7 and 13 types of bankruptcy can deal with them. Today’s blog post explains what determines whether a particular judgment lien can be removed, or “avoided,” and how that’s done.

The Rules for “Avoiding” Judgment Liens

If a creditor has sued you and gotten a judgment, and your name is on the title of any real estate, including your home, most likely that creditor now has a judgment lien against that real estate.

If you file bankruptcy, the debt that was the basis for that judgment would in most cases be legally discharged (written off forever). But the judgment lien is legally separate from that debt. The lien could survive the bankruptcy discharge, unless you qualify for judgment lien “avoidance.”

To qualify for “avoidance” the judgment lien has to meet these conditions:

  • The real estate to which the judgment lien attached has to be your “homestead.” That means you qualify for and claim a homestead exemption on that real estate. Homestead exemption laws vary depending what state you are in when you file bankruptcy, but generally the place you are living qualifies as your legal homestead.
  • The lien being “avoided” can’t just be any kind of lien but has to 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.” Generally that means that the lien resulted from a judgment entered against you in a lawsuit or similar legal procedure.
  • The “judicial lien” can’t be related to child or spousal support or a mortgage foreclosure.
  • The lien has to “impair” the homestead exemption. That essentially means that the lien eats into that part of the equity in the home that is protected by the applicable homestead exemption. Specifically the law says that a judgment “lien shall be considered to impair [a homestead] exemption to the extent that”:

1. the value of all the liens on the house that are ahead of the judgment lien being “avoided”

2. PLUS the amount of that judgment lien being “avoided”

3. PLUS the amount of the homestead exemption that you are entitled to

4. EXCEEDS the value of the house (assuming you are its sole owner).

For example, assume that your homestead exemption (the amount you can protect) is $30,000, your home is worth $200,000, your first mortgage balance is $170,000, and you owe $2,000 in accrued but not yet paid property taxes. Your home has a recorded judgment lien in the amount of $15,000.

1. The value of the two prior liens on the home—the mortgage and the property tax lien, added together ($170,000 + $2,000) totals $172,000.

2. Add to that the judgment lien amount ($15,000) to make $187,000.

3. Then add the homestead exemption ($30,000) to total $217,000.

4. That $217,000 exceeds the $200,000 value of the home by $17,000.

So the impairment is $17,000. Since that is larger than the amount of the judgment lien of $15,000, then entire lien is considered impaired—all of it eats into the homestead exemption. As a result, the whole judgment lien can be fully “avoided”—taken off the home’s title.

Partial Judgment Lien “Avoidance”

A judgment lien could be only partially “avoided.”

In the above example change the market value of the home from $200,000 to $205,000. Then the total of the prior liens, the judgment lien, and the homestead—$217,000—would exceed the $205,000 value of the home by $12,000. So, $12,000 of the $15,000 judgment lien could be “avoided.” This would leave a non-avoidable lien of the remaining $3,000.

The “Avoidance” Doesn’t Happen Automatically

Judgment lien “avoidance” takes an additional legal procedure within your bankruptcy case. If that procedure—usually a motion filed by your attorney—is not done the judgment lien will continue to attach to your home title after the bankruptcy case is finished.

So that procedure should be done while your bankruptcy case is still open and active. If not you may be able to reopen your case later, but that would likely cost you hundreds of dollars more in court and attorney fees. Furthermore you may not be able to reopen your case if doing so “prejudices” the creditor—such as if in the meantime it incurred costs in starting a foreclosure of your home.

Chapter 7 or Chapter 13

Unlike other features of consumer bankruptcy, judgment lien “avoidance” is available under either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”

In a Chapter 7, besides the judgment lien being taken off the title (either in full or in part as just described) usually the avoided lien debt amount is discharged, or permanently written off. This usually happens only 3 or 4 months after the case is filed.

In Chapter 13, the avoided lien debt amount is added to the rest of the “general unsecured” debts. Over the course of the 3-to-5-year Chapter 13 payment plan, you pay the pool of all your “general unsecured” debts as much as you can afford to pay, but only after paying other higher priority debts in full. This means that the avoided judgment lien debt amount is usually paid only pennies on the dollar and sometimes nothing.

Often, adding the avoided debt amount to that pool of “general unsecured” debts does not at all increase the total amount you need to pay to finish your Chapter 13 case. That’s because the same amount you pay into the pool is just redistributed among those creditors.  

At the end of the Chapter 13 case whatever part of the avoided judgment lien debt amount has not been paid gets forever discharged.

Conclusion

So, if you own a home which has a judgment lien recorded against it, getting that lien “avoided” is an important extra benefit of filing bankruptcy. It’s a great help in getting a fresh financial start on your home and on your entire financial life.

 

A Fresh Start by “Avoiding” a Judgment Lien on Your Home

January 29th, 2016 at 8:00 am

Bankruptcy doesn’t just give you a fresh start by writing off debts. It frees up your home by often getting rid of its judgment liens.  

 

Writing off debts is good. But if a creditor got a judgment against you, and you own a home, most likely that debt has also turned into a judgment lien on the title of your home. You’re not going to get much of a fresh start on your home if it continues to be saddled by a judgment lien or two.

Bankruptcy is relatively good at writing off (“discharging”) debts. But getting rid of liens can be trickier. However, both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” do provide a way to get rid of, or “avoid,” judgment liens.

Today’s blog post is about judgment liens, why they are so dangerous, and how both “Chapters” of consumer bankruptcy can be very helpful in dealing with judgment liens. (Then the next blog post will be about whether a particular judgment lien can be “avoided,” and how that’s done.

The Dangerous Judgment Lien

If a creditor has gotten a judgment against you at any time before you file bankruptcy, and you are on the title of any real estate including your home, that judgment has likely turned into a lien on the title to that real estate.

A lien is a creditor’s “security interest” in something you own. A lien effectively gives the creditors rights over what you own in order to make you pay the debt you owe.

A judgment lien is a lien which usually attaches to your home (as well as often to other assets) when a judgment is entered against you in a lawsuit.

A judgment lien is dangerous because it gives the creditor a huge amount of leverage to make you to pay the entire debt. If you try to sell or refinance your home that debt has to be paid—usually in full—out of the sale or refinancing proceed you would have received and were likely counting on. The judgment lien may even altogether prevent you from completing the sale or the refinance. In many situations the judgment lien gives the creditor the ability to foreclose on your home, forcing you to pay off the debt in order to save the home.

You May Have a Judgment Lien without Knowing It

Sure, usually you know when you’ve been sued by a creditor. You’re handed papers that make that clear. But sometimes you don’t get personally served and don’t find out about the lawsuit. Maybe you get something in the mail and because you think it’s just another collection notice you don’t even open it. Or you looked at it but didn’t read it closely. Or you tried to but you just didn’t understand the consequences of not responding in time.

So you don’t respond within the time provided, you lose the lawsuit by default, and a judgment is entered against you for the amount that the creditor asked for. A judgment lien then attaches to your home. (The details of the procedure differ state to state.)  Even if you are fully paying attention, you may not be informed that the judgment has been entered. Or you may not be told when that judgment turns into a lien on your home.

You may think you have not judgment or no lien because you worked out a settlement with a creditor.  For example, you may have responded to a creditor’s collection efforts by agreeing to make monthly payments. Even if you weren’t sued beforehand, the creditor may have required you to have a judgment taken against you if did not make the payments as agreed. As a result you could have a judgment lien on your home without realizing that you do.

The Benefits of Bankruptcy

Filing bankruptcy—either a Chapter 7 or 13—give you three big advantages when it comes to judgment liens:

1. Bankruptcy will stop the creditor from getting a judgment lien if it hasn’t already gotten one. Even if a lawsuit has already been filed, as long as the bankruptcy is filed before the judgment is entered it never will be and no judgment lien will attach to your home.

2. If a judgment lien has already been entered, usually bankruptcy will stop the lien from being enforced. If the law allows a judgment lien to be foreclosed to force you to pay, the creditor won’t be able to start or finish such a foreclosure.

3. In addition to the underlying debt likely being discharged (written off forever) in bankruptcy, the judgment lien itself can often also be gotten rid of forever through the judgment lien “avoidance” procedure. Our next blog post is about how to qualify for this extremely helpful procedure, and how it works. See Section 522(f) of the Bankruptcy Code for an advance look at this.

 

 

Chapter 7 and Chapter 13–Selling Your Home in the Near Future and Protecting Its Increased Equity

October 30th, 2015 at 7:00 am

Have the flexibility to sell your home when you want, giving time for it to add equity, while keeping creditors away from that equity. 

 

 

If you are feeling overwhelmed by debts and wondering if you should file bankruptcy, and if in the midst of this you own a home, you might also be wondering whether you should be selling it. Let’s assume that you’d rather not sell right now, because it’s not the right time for personal or family reasons. Or maybe the home doesn’t have much equity now but its value is increasing and so you think it will likely have significantly more equity two, three years from now.

But the problem is that you have creditors threatening to sue you, get judgments and put liens on your home, eating up any equity that’s there now and any future equity as well. How can bankruptcy help here?

The Chapter 7 Solution

Our last blog post was about the advantages under Chapter 7 “straight bankruptcy” if you currently have some equity in your home but no more than is protected by the homestead exemption. Assuming you were current or close to current on the home’s mortgage(s), you could keep your home and its equity would be protected from your creditors. Pending lawsuits would be stopped and future ones would be prevented, avoiding judgment liens against your home. Judgment liens that were already on your home would likely be removed. All that would happen within about 3 or 4 months after your Chapter 7 case was filed. Then you could sell your home immediately afterwards, or later if you wanted to wait for a better time or after the home’s value increased.

When Chapter 7 Doesn’t Help Enough

But what if you are way behind on your home’s mortgage(s), on its property taxes, or homeowners’ association fees? Or what if you have debts that would not be discharged (written off) in a Chapter 7 case, such as recent income taxes, back child or spousal support, or student loans?

In these situations Chapter 7 doesn’t help enough. Having a little equity in your home doesn’t help if you are behind on the mortgage, property taxes, or homeowners’ association fees, all of which could result in your home being foreclosed out from under you. And debts that aren’t discharged could become liens against your home after the Chapter 7 case is over, sometimes giving their creditors the ability to foreclose, and at least their liens eat up your equity.

The Chapter 13 Solution

These two sets of problems are both solved by instead filing a Chapter 13 “adjustment of debts,” allowing you to protect your home’s present and anticipated equity.

First, if you are behind on a mortgage, property tax, or homeowners’ association obligation, filing a Chapter 13 case will prevent the creditor from taking action against you and your home while giving your 3 to 5 years to catch up on that mortgage, tax, and/or obligation. Under certain circumstances you’d get significant advantages, such as being able to “strip” your second (or third) mortgage so that you would no longer need to make the monthly payment and could write off most of the balance, setting your home up for future building of equity. Or you could “avoid” judgment liens—remove them from your home’s title—freeing up equity that they were tying up.

Second, if you owe debts that can’t be discharged in a Chapter 7 case, such as income taxes or support arrearage, in most situations those types of creditors would be stopped from taking any collection action against you while you paid the obligation, again over 3 to 5 years, through payments that fit your budget. You would get various breaks with many of these kinds of debts. For example, with income taxes, usually no future interest and penalties would accrue once you filed your Chapter 13 case, reducing the total you’d need to pay. Income tax liens on your home would be resolved in beneficial ways, minimizing what you’d need to pay on them before they were released from your home’s title.

Selling When You Want

Chapter 13 often gives you tremendous flexibility about the timing of the sale of your home.

When you file a Chapter 13 case or very shortly thereafter, you and your attorney put together a formal payment plan, laying out your intentions with all your creditors. That plan goes through a bankruptcy court approval process, with limited opportunities for creditors to object. If you are intending to sell your home during the 3-to-5-year length of the Chapter 13 plan, you could state in your plan when you intend to do so, what creditors you would pay when that happens, and then what the rest of your payment plan would look like afterwards up to the completion of your case.

This allows you to, in the right circumstances, to hold off paying some creditors until when you sell your home. Holding off selling the home could well give you more equity to work with when you do sell. You could also have more equity then because of removing certain liens on the home as mentioned above.

Or if you are just considering selling your home down the line and are not yet sure about it, you would not necessarily say anything about that in your Chapter 13 plan. Instead you would put together a payment plan assuming that you’d keep your home, giving you time for your personal/family/employment situations to play out, as well as to see whether your home value increases.

Then you could decide a couple years into your Chapter 13 case to amend your payment plan and sell your home, if that is in your best interest. You may be able to complete your case with the sale or else finish off the case after you sell.

Or instead you could wait until the completion of your case and sell at any point afterwards.

Or finally at any point during your Chapter 13 case you could convert it into a Chapter 7 case and sell your home a few months later as soon as that was finished.

We’ll talk about these delayed selling options in our next blog post in a couple days. But you can see how Chapter 13 can be a tremendously flexible way to keep your creditors at bay while you address your obligations in a manageable way, and while keeping open your options for selling your home.

 

Chapter 7 and Chapter 13–Avoiding Judgment Liens on Your Home

October 16th, 2015 at 7:00 am

An underappreciated benefit of filing bankruptcy is that you can usually remove judgment liens from your home’s title.

 

In so many ways Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are very different, particularly in the tools they each use to help with your home mortgage(s) and other debts related to the home. But the removal, or “avoidance,” of judgment liens is one tool that can be used in either bankruptcy procedure.

What is a Judgment Lien?

First, a lien is a creditor’s legally enforceable interest in your property. Second, a judgment lien is an involuntary lien which usually attaches to your home after a judgment is entered against you in a lawsuit. It is a lien on your home’s title, in effect making the home collateral on the debt.

Judgment liens can arise in unexpected ways. Usually you know you’ve been sued and at some point find out that the lawsuit resulted in a judgment against you and a judgment lien on your home. But a judgment lien can attach even if you settle with the suing creditor, and sometimes even if you enter into a settlement without even being sued. You might even have a judgment lien on your home without you knowing that you were sued.

Judgment liens are dangerous for various reasons, eating up equity in your home, potentially jeopardizing its refinance or sale, and hurting your credit. But most dangerous, in many situations the judgment creditor can execute on its judgment lien, resulting in a forced sale of your home to pay the judgment debt.

Judgment Lien “Avoidance” in Bankruptcy

Such a forced sale can be prevented by filing bankruptcy, and in many situations the judgment lien can be gotten rid of forever through the judgment lien “avoidance” procedure. (See Section 522(f) of the Bankruptcy Code).

Be aware how unusual this is, even for bankruptcy. Of course bankruptcy gets rid of debts, but usually it doesn’t get rid of liens. Most conventional kinds of liens—like a vehicle lender’s lien on your vehicle’s title, or your home mortgage holder’s first mortgage on your home’s title—stay on those titles in spite of filing bankruptcy.

So Why Can Judgment Liens Be Removed in Bankruptcy?

Decades ago Congress decided that people’s rights to their homes under certain circumstances should come ahead of creditors’ rights under judgment liens. After all, undoing a judgment lien simply puts the creditor back in the same unsecured position it was in before it sued you and got the judgment lien attached to your home.

The Conditions for Judgment Liens “Avoidance”

The conditions have to be right to get rid of the judgment lien.  This “avoidance” power is limited to judgment liens which “impair” your “homestead exemption.” To explain, here are the conditions that must be met:  

  • The real estate to which the judgment lien has attached must be your “homestead,” which generally just means it’s where you live.
  • That home has to qualify for a “homestead exemption.” State and federal laws provide a certain amount of protection in your home, usually described as a certain dollar amount of equity in a home.
  • 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.”
  • This “judicial lien” can’t be for child or spousal support, or for a mortgage foreclosure.
  • The judgment lien at issue must “impair” the homestead exemption, which generally means that it cuts into the equity protected by the applicable homestead exemption.

These conditions are usually not that hard to meet. Most people filing bankruptcy who own the home they live in qualify for a homestead exemption, don’t have huge amounts of equity in their homes, and their judgment lien cuts into their protected equity.

Here’s a simple example. Say you own a home with $20,000 of equity (it’s worth that much more than your mortgage), are entitled to a $30,000 homestead exemption, and have a judgment lien against you and the home for $15,000. All of your equity is protected by the homestead exemption because the amount of equity is less than the maximum protected amount. The judgment lien all cuts into that protected equity. So it can be “avoided”—gotten rid of—through bankruptcy.

 

Mistakes to Avoid–Selling Your Home out of Desperation

September 7th, 2015 at 7:00 am

If you’re hurting financially and getting pressured to sell your home, first get bankruptcy advice to potentially save you lots of money. 

 

Do you have serious financial pressures inducing you to sell your home? Those pressures may be from your mortgage lender itself or other home-related debts like property taxes, a second mortgage, or some other creditor that has put a lien on the home, such as the IRS or your state income tax agency. Or you may have other debts not related to your home but which put your home in jeopardy because they suck money away from your mortgage payments.

So these pressures may be tempting you to hurriedly sell your home, or to just give it up to your mortgage lender. But if you rush to sell your home (or surrender it) you could lose out on the opportunity to keep it through the tools of bankruptcy. Some of those tools may even create equity in your home, making it economically more worthwhile to save. Or maybe you would be enabled to still sell it, but do so later (even a couple years later) at a higher price and/or when the timing is better for you.

Our next few blog posts will go through some of the major ways bankruptcy can save you money, sometimes a tremendous amount of money, on your home. The first way, for today’s blog post, involves judgment liens on the title of your home.

Being Saddled with a Judgment Lien

If you have been sued by a creditor (or, for that matter, by anybody with a claim against you), and you didn’t win the lawsuit or pay off the obligation, most likely a judgment was entered against you. In some situations, you might not even realize or remember that this had happened to you. It may have been many years ago, potentially even before you bought your home, and the judgment lien may have attached after you bought the home.

Even if you did deal with it at the time and settled the matter and are making payments under an agreement with the creditor, most likely a judgment was still entered against you in case you didn’t end up paying as agreed.

Either way, the judgment is very likely a lien against your home. That lien amount is often substantially more than the amount you thought you owed the creditor, as a result of extra costs that the creditor stacks onto the basic debt—for court filing fees, attorney fees, late charges, and continuously accruing interest.

Potential Future Judgment Liens

Even if you haven’t been sued by a creditor, if you are behind on payments, or the debt was sent to collections, a creditor or its collection agency may sue you in the near future. That creditor could get a judgment against you and place a lien on your home’s title. If you’re in the process of selling your home, this lien could hit the title before the closing of your home sale.

Paying a Judgment Lien Out of Home Sale Proceeds

In all these situations, the judgment lien generally has to be paid in full before the house can be sold. If, as usual, the judgment is paid out of the proceeds of the sale, this dollar for dollar reduces the amount you receive out of the sale. And the lien could reduce the amount of money available to go to more important debts that you intended to pay out of the sale proceeds, such as property or income taxes, or child or spousal support.

If there are not enough sale proceeds to pay the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. To the extent that you don’t pay it in full, you would likely continue owing the balance, and need to pay it at some point. Finally, if your home does not sell for enough money to pay off the judgment creditor and it won’t settle for less, the judgment lien could jeopardize your sale.

Don’t Pay a Judgment Lien, But Instead “Avoid” the Lien

In contrast, by filing either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” you can often “avoid”—permanently get rid of—that judgment lien and “discharge”—legally write off—the debt that resulted in the judgment. That would allow you to sell the home without paying anything on that debt.

The condition you have to meet to void the entire judgment lien is that all of this lien needs to eat into the equity in your home that would otherwise be protected by the homestead exemption.

To explain by example, assume that except for the judgment against you, your home would have $25,000 of equity (say, a $250,000 home with a mortgage of $225,000). But you have a judgment against you for $10,000, resulting in a judgment lien in that amount on your home title. Assume that in your state you’re entitled to a homestead exemption of $50,000 of home value or equity. So the $10,000 judgment lien is eating into that $25,000 of equity that you would have without the judgment, all of which is protected by the homestead exemption. As a result, in bankruptcy that $10,000 judgment lien would be “avoided”—taken off the home’s title—and the underlying debt would be discharged—forever forgiven—saving you $10,000 and giving your home that much more equity.

Clearly, if you have a judgment against you and a judgment lien against your home, you should be talking to a bankruptcy attorney. And not selling the home out of desperation to pay that judgment lien and your other debts.

 

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