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More Bankruptcy Benefits for Your Home

June 24th, 2019 at 7:00 am

Besides helping with your mortgage, bankruptcy protects your home against other liens—from judgments, income taxes, and homeowner associations.  


Last week we gave you 7 ways that bankruptcy can either save your home now or protect it going forward. Here are the remaining 8 ways (#8 through #15), mostly involving involuntary liens placed on your home by special creditors.

8. Judgment lien “avoidance”:  

You can get rid of a present judgment lien that’s on your home’s title if it “impairs” your homestead exemption. This means that it “eats into” the equity that is protected by the exemption. Judgment lien avoidance turns a secured debt that you’d have to pay to protect your home into an unsecured one. See Section 522(f)(A) of the U.S. Bankruptcy Code.  You could then usually write off (“discharge”) that unsecured debt in a Chapter 7 “straight bankruptcy” case. Or you could pay little or nothing on that debt in a Chapter 13 “adjustment of debts.”  

9. Prevent future judgment liens:  

Bankruptcy stops ongoing or future lawsuits against you. See the “automatic stay” of Section 362(a)(1) and(6) of the Bankruptcy Code. First, ongoing lawsuits are usually frozen in their tracks so they can never turn into judgments. Second, any creditors which have not sued you beforehand usually can’t ever do so (with some rare exceptions). So they can’t get a judgment, and can’t ever record a judgment lien on your home. Since not all judgment liens can necessarily get “avoided” under #8 above, it can be very important to file bankruptcy with your bankruptcy lawyer before a creditor gets a judgment.

10. Prevent upcoming income tax liens by discharging the tax debt: 

Similarly, in many situations bankruptcy prevents the IRS or your state from recording an income tax lien against your home. Section 362(a)(4 and 5). Under either Chapter 7 or 13 you can discharge older and otherwise qualifying tax debts. During the bankruptcy case the IRS/state can’t record a tax lien. And it can’t do so afterwards because the tax debt no longer exists. So, your bankruptcy filing prevented the tax from being secured against your home, which would’ve created serious disadvantages for you. As a result it’s highly preferable to file bankruptcy before a tax lien gets recorded.

11. Prevent upcoming income tax liens by paying off the tax debt:  

If the tax debt is newer or otherwise doesn’t qualify for discharge, pay the tax through Chapter 13 filed through your bankruptcy lawyer. Section 1322(a)(2). You pay the tax based on your realistic budget instead of the IRS/state’s imposed one. You can delay paying on the tax while you pay more important debts (such as to catch up on your mortgage). You don’t pay ongoing interest and penalties (since the debt is unsecured). Again, during the case the IRS/state can’t record a tax lien. And it can’t afterwards because by then you’ll have paid off the tax. You’d have prevented IRS/state from gaining the significant advantage against you of a recorded tax lien.

12. Prevent or address a child/spousal support lien against your home:  

Discharge your other debts with a Chapter 7 or 13 case so that you don’t fall behind on support payments. Or if you’re already behind, catch up on your support obligations with a Chapter 13 payment plan. As long as you pay as you’ve agreed, no new support lien can be imposed on your home. And your ex-spouse or support enforcement agency can’t foreclose on any pre-existing support lien. Your home is protected while you catch up.

13. Protect your home from your homeowners’ association:

If you’re get behind on homeowner association dues and/or assessments, your HOA gains tremendous power over you. You can regain the upper hand by filing a Chapter 13 case. You have to pay the back dues or assessment(s) if you want to keep your home. But you have as much as 5 years to catch up through a Chapter 13 payment plan. Throughout that time the HOA can’t foreclose or take other collection action, as long as you’re paying your plan.

14. Buy time to sell your home:

In many different situations, bankruptcy gives you more time to sell a home. You may need more time to get it ready for sale, or may want to move later for personal reasons. Chapter 7 usually delays a mortgage foreclosure, or similar actions against your home by other lienholders, for a few weeks or months through Chapter 7. You can likely get much more time to sell, sometimes as long as 5 years, through Chapter 13.

15. Resolve accounting disputes with your mortgage lender:

If you fall behind on your mortgage, it can be shockingly difficult to get on the same page with your lender about how much you owe. This is especially true if you have a history of being behind over an extended period. This accounting confusion has been a serious problem for millions of homeowners over the last decade or two. So, in 2011 a new procedure was created (mostly for Chapter 13) to efficiently resolve such disputes. See Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It’s a very handy tool when you’re trying to save your home and your lender is not cooperating.

 

Reversing Real Estate Judgment Liens with Bankruptcy

April 26th, 2018 at 11:40 pm

Texas bankruptcy attorneyCreditors know how to work the system to get the money owed to them. In some cases, creditors have the courts put a lien on debtor’s possessions without the owner’s consent or knowledge, granting the creditor a legal claim over the property. By placing a lien on real estate, a vehicle, or personal property, a creditor secures payment of the money owed, sooner or later.

Buyers will not purchase items without a clear title, and a lien makes any title unclear. Although a creditor has the option to sell the property, such as in foreclosure, most wait until the debtor chooses to sell the property. At that point, seller pays the debt out-of-pocket or uses part of the purchase price to repay the debt. Fortunately, in Chapter 7 bankruptcy, you may be able to avoid the whole ordeal by getting rid of the judgment lien altogether.

Consensual Versus Non-Consensual Liens

Liens are placed on property both with and without consent. If consent is given, it happens at the origination of the creditor-debtor relationship. For example, either the debtor is asking for money to purchase property, such as a home or a vehicle, where the bank would then own the property, and the purchaser makes payments to the financial institution; or the debtor is asking for a financial loan and offers property they already own as collateral.

Alternatively, if someone wins a judgment against another party in court and money is owed, a judge may grant a judgment lien, which frequently happens with unpaid debt. This is an example of a non-consensual lien.

Lien Avoidance

Through judgment lien avoidance, you can permanently remove a judgment lien. If this occurs during bankruptcy, you will own the property, free-and-clear with no other payments. Lien avoidance is recommended, if possible, even if you do not intend to keep the property long-term, as you can then sell the property to pay for other things. To qualify, the following must be true:

  • The lien is a court-issued money judgment;
  • There is exempt equity in part of the property; and
  • Property loss impairs the exemption.

Reduce Courtroom Surprises

Many filers do not realize they have any liens on their property. Others discover partial claims. Sometimes, debtors do not have equity during the bankruptcy filing, but that changes down the road. In all of these circumstances, a New Braunfels, TX bankruptcy attorney can help. If there is a lien on your property and you have little, no, or even negative equity, the Law Offices of Chance M. McGhee will explore all of your options. Call us today for your free, no-obligation consultation at 210-342-3400.

 

Sources:

https://study.com/academy/lesson/types-of-liens-equitable-possessable-statutory.html

http://www.landlordstation.com/blog/what-is-a-judgment-lien/

Secured Debts Treated Like Unsecured Debts in Chapter 7

August 10th, 2016 at 7:00 am

A secured debt can be handled like an unsecured debt if you surrender the collateral, “avoid” a judgment lien, or just keep the collateral.

 

The “Discharge” of “General Unsecured” Debts

In our last few blog posts we have shown how “general unsecured” debts are handled under Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” Most of the time those debts are simply discharged—legally written off—under Chapter 7. They are also discharged at the successful completion of a Chapter 13 case, usually but not always after partial payment.

Secured Debts

Debts that are secured by a lien on something you own are usually treated quite differently. The debt itself may well be discharged in the bankruptcy case just like an unsecured debt. But you also have a lien to contend with.

A lien is a creditor’s “interest in [your] property to secure payment of a debt.” (See Section 101(37) of the Bankruptcy Code.)  A lien is not discharged in bankruptcy. It’s a property right that you have to deal with separately from the debt itself.

This actually makes common sense. If you finance the purchase of a vehicle, the lender is naturally a lienholder on the vehicle’s title. When you file a bankruptcy case, you can discharge the balance owed on the vehicle loan. But the lender will still have a lien on the vehicle, and so can repossess it if you don’t pay. Usually you have to agree to pay the balance in order to keep the vehicle.

As you can see secured debts are very different than unsecured ones.

But there are a few narrow exceptions, when you can act to turn a secured debt into an unsecured one. As we said in the introductory sentence, a secured debt can be handled like an unsecured debt if you

1.  surrender the collateral,

2.  “avoid” a judgment lien, or

3.  sometimes, just keep the collateral.

1. Surrender the Collateral

Whether you have a vehicle loan, a home mortgage, or a store credit card with liens on everything you purchased, you can effectively turn the debt into an unsecured one by giving the collateral to the creditor.

Admittedly that’s not helpful if want to keep the collateral. But there are many situations where surrendering the collateral is well worth the benefit of not paying the debt.

With vehicle loans you would often owe a substantial amount of money even after surrendering the vehicle outside bankruptcy. Surrendering the vehicle in bankruptcy lets you get out of a bad deal without having to pay a small fortune.

We’ll talk about this more and give a couple practical examples in our next blog post.

2. “Avoid” the Judgment Lien

If you own a home just about any unsecured creditor can turn the debt into one secured by the home. Suing you and getting a judgment against you in most states gives the creditor a judgment lien on your home.

Bankruptcy can in many cases empower you to “avoid”—permanently get rid of—a judgment lien on your home. This “avoidance” can be done under either Chapter 7 or 13. It requires the right combination of several numbers—the amounts of the judgment lien, the equity in your home, and your allowed homestead exemption.

We’ll dig into when this works and give examples a couple blog posts from now.

3. Keep the Collateral Without Paying

Sometimes a secured creditor just doesn’t care enough about the collateral to bother making you surrender it. Or sometimes it’s not clear whether the creditor even has a valid lien. It may not want to risk repossessing something that it does not have the legal right to repossess.

In these situations the best option may simply be to file bankruptcy and act as if the debt is unsecured. That is, don’t pay it and see whether the creditor asserts any rights in the collateral.

This option comes with some risks, which we’ll explain and make clear with some examples in an upcoming blog post.

 

Prevent a Creditor with an Unsecured Debt from Turning it into a Secured Debt

June 29th, 2016 at 7:00 am

Because of Chapter 13’s much more powerful automatic stay, its ability to prevent judgment liens and tax liens is extremely valuable.  

 

Our last blog post described ways that the “automatic stay”—your protection from creditors’ collection actions—is so much more powerful in a Chapter 13 “adjustment of debts” case than in a Chapter 7 “straight bankruptcy.”

One way that this Chapter 13 protection from creditors is better is simply that it lasts much, much longer than under Chapter 7. This benefit is also related to today’s topic, how Chapter 13 can permanently stop unsecured creditors from turning their debts into secured ones. This is an underappreciated advantage of filing a Chapter 13 case.  

Prevent Creditors from Turning Unsecured Debts into Secured Ones

Creditors with secured debts generally have much more leverage than those with unsecured debts. In a Chapter 7 case most unsecured debts get “discharged”—legally written off—without any payment required. In a Chapter 13 case unsecured debts are only paid if and to the extent there is any money left over during the course of the payment plan after paying secured creditors and special “priority” debts (such as unpaid child support and recent income taxes).

Creditors with unsecured debts have a variety of ways of turning those into debts secured against your assets. Two examples are judgment liens and income tax liens, which we’ll discuss more in a moment.

Those liens, as well as other kinds, can turn a debt that can simply be discharged into one that has to be paid in full or in part. Or even if it was a debt that could not have been discharged (such as unpaid child support or recent income taxes), once the creditor has a lien the debt is more dangerous for you, even if you file a bankruptcy afterwards.

Filing bankruptcy—either Chapter 7 or 13—prevents a creditor from converting its unsecured debt into a secured one. The same law—the “automatic stay”—that stops other forms of collection action against you immediately upon the filing of a bankruptcy case, also stops creditors from creating liens against your assets. The U.S. Bankruptcy Code states that filing a bankruptcy “petition… operates as a stay… of–… (5) any act to create… against property of the debtor any lien” that secures a debt existing at the time the petition is filed. (See Section 362(a)(5) of the Bankruptcy Code.)

Preventing Judgment Liens

Any creditor with an unsecured debt you owe can sue you if you do not pay the debt according to its terms. Most of the time such a lawsuit turns into a judgment against you on the debt. State laws determine how the creditor can then collect on the judgment against you. But usually the judgment either automatically becomes a lien against some of your assets or the creditor can take additional steps to create a lien, such as a lien against your home for the amount of the judgment.

As soon as there is a lien, a debt which could otherwise be discharged as an unsecured debt may have to be paid in full or in part in order to get a release of the judgment lien on your real estate or other assets.

Filing either a Chapter 7 or 13 case on a debt that has not yet turned into a judgment will prevent that from happening. Even if a lawsuit has been filed the judgment can be prevented if the bankruptcy is filed quickly enough.

If the debt is the kind that can be discharged in a Chapter 7 case—which includes most unsecured debts—then that will take care of the debt. At the end of the case the debt is discharged and then the creditor has no more debt to sue you for and create a judgment lien on your assets.

But what if the debt is one that is not discharged in the 3 or 4 months that a Chapter 7 case takes to process? If you are accused of having gotten the debt through fraud or misrepresentation there is a good chance the debt would not be discharged in a Chapter 7 case, for example. If the creditor takes appropriate action during the case the debt would not be discharged and the creditor can turn that debt into a judgment and put a lien on your assets.

In a Chapter 13 case you can make arrangements to pay such a fraud/misrepresentation based debt during the course of the 3-to-5-year payment plan. The “automatic stay” prevents the creditor from converting the unsecured debt into a secured one (as long as the creditor does not get extraordinary permission to the contrary from the bankruptcy judge).

Preventing Income Tax Liens

Income tax debts either meet the conditions for being dischargeable in bankruptcy or they don’t meet those conditions. These conditions mostly turn on whether enough time has passed since the tax return at issue was legally due and since the tax return was in fact submitted to the IRS or state tax agency. If the tax meets the conditions for discharge, the tax is simply discharged in a Chapter 7 case, essentially like any other dischargeable debt.

But if the IRS/state records a tax lien before you file a bankruptcy case that turns the unsecured tax into a secured one. Depending on what the tax lien attaches to, you may have to pay the tax in part or in full to get the tax lien released from your assets. So it’s very important to file bankruptcy—either Chapter 7 or 13—before the tax lien is recorded.

But what if the tax is one that does not meet the conditions for discharge? Filing a Chapter 7 case will stop the tax lien for only the 3-4 months that the “automatic stay” is in effect. The IRS/state can record a tax lien on such a tax as soon as your case is closed.

However, if you file a Chapter 13 case instead the IRS/state will be prevented from recording at tax lien throughout the 3-to-5-year period that a case usually lasts. During that period you would pay that tax, on your own schedule and at the same time that you deal with your other important debts. After paying off the tax, without the threat of a recorded tax lien, and completing the case, there would be no more tax debt on which a tax lien could be recorded.

 

Giving More Thanks for Chapter 7 “Straight Bankruptcy”

November 27th, 2015 at 8:00 am

Here are more features of Chapter 7 worth knowing and taking advantage of.

 

The day before Thanksgiving we talked about the following features of “straight bankruptcy”:

1) The “Automatic Stay”: The IMMEDIATE stopping of virtually all collection actions against you and everything you own. 

2) Property “Exemptions”: Protection for ALL you own, for most people who file bankruptcy.

3) “Reaffirmation” of Vehicle Loans and Other Secured Debts: The ability to be selectively choose to keep SELECT secured debts and the collateral securing them—if and only if you want to.

4) Paying Favored “Creditors” If You Want: The right to choose to pay a SPECIAL debt that you feel a deep moral or family obligation to pay, after the bankruptcy is over and you’ve legally discharged (written-off) the debt.

5) Qualifying for the “Means Test” by Income: Most people filing Chapter 7 pass the “means test” EASILY by having less than “median income.”

Here are five more, maybe less familiar but potentially extremely helpful features of Chapter 7:

6) “Avoidance” of Judgment Liens on Your Homestead:

Chapter 7 can turn back the clock to before a creditor sued you and got a judgment against you and a judgment lien on your home, by permanently “avoiding” that lien.

It’s quite amazing that you can file a Chapter 7 case so that the “automatic stay” stops a lawsuit from turning into a judgment lien. It’s that much more amazing that even AFTER that judgment lien has attached to the title to your home it can often be REMOVED through judgment lien “avoidance.”

If your home qualifies for the homestead exemption (they almost always do), and that exemption covers all of the equity in your home (if you’re filing a Chapter 7 case that’s usually the situation), then most likely that judgment lien can be erased (“avoided”) from your title.

Then, when the debt itself is “discharged” (legally written off) just 3 or 4 months after your Chapter 7 case is filed, this debt previously secured by your home turns into no debt at all. And the equity in your home eaten up by that judgment lien becomes your home’s equity again.

7) “Redemption” of Secured Debts

If you own a vehicle worth less than what you owe on it, through a Chapter 7 “redemption” you can make your vehicle lender give you the vehicle free and clear of its lien by paying to the lender an amount equal to the vehicle’s fair market value. That fair market value could be thousands of dollars less than you owe on the vehicle, saving that much money plus the anticipated interest that would have been paid over time on that amount.

Most people don’t have the money to pay the “redemption” amount in a lump sum, which is what is required. But sometimes the money can come from a relative or some other friendly source. And then you’d have that much less to pay for the vehicle.

If you have no one who could lend you the “redemption” amount, there may be “redemption lenders” which would lend you the required amount (your vehicle’s fair market value). Trading one creditor for another in this way may well be worthwhile if you owe thousands of dollars more than the fair market value, so you’d be trading a bigger debt for a smaller one, likely with smaller monthly payments.

8) Payment of Special Debts through Your Bankruptcy “Estate”

In our last blog post we said that usually everything that a person filing a Chapter 7 bankruptcy case owns is covered by property “exemptions,” and so everything is protected from being “liquidated” by the trustee to pay to your creditors. But sometimes you own an asset or set of assets you don’t care about surrendering—for example, if you closed down a business and have inventory or business equipment you no longer need, or if you own a boat that you don’t mind parting with because it costs too much to maintain. If you surrender such assets to the Chapter 7 trustee after selling them, he or she may use most of the sale proceeds to pay a debt or two that you want to be paid, and/or a debt that can’t be “discharged” (legally written off) and so you would have to pay otherwise.

The reason debts that you want to pay could be paid by the Chapter 7 trustee instead of the other debts is that by law “priority” debts must be paid in full before anything at all is paid on the rest of the debts. So, any child or spousal support arrearage would be paid first. Then recent income tax debts which can’t be “discharged” would next be paid, ahead of most other debts. (There are other “priority” debts but support and income taxes are the most common in consumer bankruptcy cases.)

So if you owe support arrearage or income taxes, it may make sense to surrender assets that are not protected by “exemptions” so that the Chapter 7 trustee can use the asset sale proceeds to pay all or part of those special debts.

9) Getting Back “Preference” Payments from Creditors:

Chapter 7 also empowers you to turn back the clock in another quite astounding way—you can sometimes force a creditor to pay BACK what you either voluntarily or involuntarily paid to that creditor before you filed bankruptcy.

For example, if a creditor garnished your paychecks or bank account during the 90-day period before your Chapter 7 case is filed, and the amount garnished totaled $600 or more, that creditor could likely be ordered to return that garnished money, the “preference” payment.

In most cases that money would be returned to you, if it could be covered by a property “exemption.” (See item 2 above and in our last blog post.) You may have a “catch-all” “exemption” available to you that applies to miscellaneous money such as this.

Even if there is no available “exemption,” so that the money goes to the Chapter 7 trustee instead of to you, that money could still benefit you by paying a child/spousal support arrearage or recent income taxes, as just explained in section 8 above.

10) “Discharge” of Debts:

The primary point of bankruptcy—especially Chapter 7—is to get rid of unmanageable debts. This power to undo your legal obligations is truly something to be grateful for. Throughout much of the history of bankruptcy laws over the centuries, the debts that remained after a debtor’s assets were liquidated continued to be owed. There was no “discharge” at all of any debts.

So, to be able to get rid of all or most of your debts, and to get it done usually in a matter of 3 or 4 months, is indeed a wonderful thing. It, along with these other powerful features of Chapter 7, allows you to get a truly fresh start.

 

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210-342-3400

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