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Archive for the ‘judgment liens’ tag

Bankruptcy Helps Delay Your Home Sale

October 7th, 2019 at 7:00 am

When you need a rather quick solution, Chapter 7 can deal with your creditors and buy you time to sell your home, in the right circumstances. 

Our last several blog posts have been about using bankruptcy to either prevent various kinds of liens hitting your home or deal with those liens if they happen. For example, in the last few weeks we’ve addressed, in reverse order:

  • Protecting your  home from homeowners’ association dues and assessment liens
  • Addressing child  and spousal support liens
  • Preventing income tax liens through Chapter 7 and Chapter 13
  • Dealing with already-recorded income tax liens
  • Preventing judgment liens, and removing them if they’ve already attached to your home

So clearly bankruptcy gives you a multitude of tools to help you preserve your home and its equity.

It can do even more. In the midst of dealing with all your debts, bankruptcy can buy you time to sell your home. Let’s show you how, starting with Chapter 7 today, and Chapter 13 next week.

Chapter 7 Advantage—It’s Quick

Chapter 7 “straight bankruptcy” is quick.

Its quickness helps a number of ways. Chapter 7s are less complicated to prepare and almost always cost you less. So, practically speaking, you can usually go from your initial meeting with your bankruptcy lawyer to filing bankruptcy, faster.

This can be crucial in at least two sets of circumstances.

First, you’re up against some kind of debt-collection or possession-losing event that bankruptcy needs to stop. This can be related to your home, such as the start or the beginning of a mortgage foreclosure. Or it can be unrelated, such as a collection lawsuit against you, a paycheck garnishment, or vehicle repossession. You need to quickly file bankruptcy to stop a creditor from hurting you.

Second, you need to prevent some kind of lien from hitting your home. Preventing an income tax lien or judgment lien, for example, can, under some circumstances, mean the difference between not paying the underlying debt at all and paying it in part or in full.

Chapter 7 Advantage—It Focuses on the Present

The other big Chapter 7 advantage is that it focuses on your situation at the moment of filing. This is important as it applies to your assets and income.

Regarding your assets, Chapter 7 fixates—for most purposes—on your assets and their value at the moment of filing. It generally does not care about future assets (again, with rare exceptions).

This can be crucial when dealing a home that’s increasing in value. You may be getting close to having the maximum allowed equity for your applicable homestead exemption. Assume, for example, that your home is worth $250,000, you owe $230,000, and your state has a $25,000 homestead exemption. So you’d currently have $20,000 in equity ($250,000 minus $230,000). That equity amount can go up quickly if your property’s value is increasing, plus you’re paying down your mortgage (and maybe other liens against the home). Next year you may have too much equity to file a Chapter 7 case. Filing now lets you protect your equity now, and then it can grow freely after you’ve gotten your fresh start.

Regarding your income, Chapter 7 fixates—again for most purposes—on your income at the time of your filing. Future income, including increases in income, is generally outside of the reach of your creditors and the Chapter 7 trustee.

Buying Time to Sell Your Home

With all this in mind, how does Chapter 7 buy you time in selling your home?

Consider two scenarios. One, you’re current on your mortgage, and second, you’re far behind.

Buying Time When Current on Your Mortgage

First, assume you are current or close to current on your home’s mortgage. The amount of your equity is less than your homestead exemption amount. You are being battered by creditors, and if you don’t act quickly bad stuff will happen. So you’re tempted to sell your home to reduce your cost of living or to get at its equity. But you either don’t want to sell, or for personal or family reasons you’d rather wait to do so.

A Chapter 7 filing would prevent or stop virtually all lawsuits and garnishments. It could prevent judgment liens and income tax liens and support liens against your home. Judgment liens that are already on your home likely could be removed. Previously recorded income and support liens could be better resolved with your greater cash flow. You’d likely be better able to afford your mortgage and other home-related costs. All that would happen either immediately or within about 4 months after your bankruptcy lawyer filed your Chapter 7 case.

Buying Time When Behind on Your Mortgage

Second, assume instead that you are not current on your mortgage but rather you’re far behind and facing foreclosure. You definitely want to sell your home but you’ve run out of time. You’re about to lose your home to foreclosure.

Chapter 7 buys you some time. Instead of losing your home—and any equity you may have in it—to foreclosure, you stop the foreclosure. You gain a few precious months to either close a pending sale or to make a sale.

Or if you are not that close to foreclosure, filing bankruptcy may improve your monthly cash flow enough so that you and your lawyer can negotiate a “forbearance agreement” with your mortgage lender. This is a payment plan for catching up on the mortgage arrearage (and maybe any late property taxes). Then, anytime either during that payment plan or afterwards, you could sell your home.

You may even be able to work that into the forbearance agreement. You could agree to relatively smaller monthly catch-up payments, and then pay off of the remaining arrearage and the entire mortgage balance from proceeds of the house sale.


Bankruptcy Can Remove a Judgment Lien

August 19th, 2019 at 7:00 am

Bankruptcy can, in the right circumstances, remove a judgment lien from the title to your home. Here are the conditions for pulling this off. 


The Problem, and the Bankruptcy Solution

Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home. The debt is encumbering the title to your home, eating up your equity.

A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home.

Those lien rights, those property rights, are similar to the lien rights of a vehicle loan lender. The lender is a lienholder on the car’s title. If the vehicle owner doesn’t pay the vehicle loan, the lender can repossess the vehicle. Similarly, a judgment lien holder on your home can, under many circumstances, foreclose on your home. At the least it can force you to pay the debt when you sell or refinance your home.

Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt. See, generally, Sections 727 and 1328 of the U.S. Bankruptcy Code. The problem is that in many situations bankruptcy does not curtail creditors’ lien rights. In the example of a vehicle loan with the lender on the vehicle’s title, if you discharge that debt the lien still survives. You generally have to either surrender the vehicle or, if you want keep the vehicle, pay the debt.

However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien. This would take away the creditor’s dangerous rights against your home. This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.” 

The Conditions for Judgment Lien Avoidance

Here’s how the process works.

When you file bankruptcy, to “avoid” a judgment lien you must meet certain conditions:

  • The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Bankruptcy Code Section 101(36). Mostly, this refers to judgment liens.
  • The judgment lien at issue must attach to your “homestead.” That is, it attaches to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.” Bankruptcy Code Section 522(d)(1).
  • The judgment lien can’t be for child or spousal support or for a mortgage. Subsections 522(f)(1)(A) and (2)(C).
  • The judgment lien “impairs” the homestead exemption. That is, “you may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs a [homestead] exemption.” Section 522(f)(1)

Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.

For Example

Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:

  • It’s a judicial lien—one “obtained by judgment.”
  • The lien attaches to your homestead—the place you “use as a residence.”
  • The lien was not for child or spousal support or related to a mortgage.
  • All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.

In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.


Your Debts in Bankruptcy

February 4th, 2019 at 8:00 am

Bankruptcy is about debts. Different categories of debts are treated differently. The categories are secured, priority and general unsecured 

Your debts are the reason you are reading this. You want to know how bankruptcy would deal with your debts.

  • Will bankruptcy write off all your debts?
  • Can you keep paying some of your debts like a vehicle loan or home mortgage to keep that vehicle or home?
  • What happens to special debts that you can’t write off like child support and some income taxes?

To answer these and other similar questions we start by getting to know the 3 legally different categories of debts: 

  • secured
  • priority
  • general unsecured

Your rights and obligations, and those of the creditor, are different with each category of debt.

Secured Debts

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Sometimes you don’t know whether a debt is secured. For example, most purchases on major credit cards create a debt that is not secured by whatever you purchased. But some card purchases—such as on some retail store affiliated cards—do create a secured debt. The paperwork that came with your card (which you’ve likely thrown away!) should tell you. Your bankruptcy lawyer will also likely know, or can find out.

Occasionally, a creditor wanted the debt to be secured but it isn’t because the creditor messed up. It didn’t take the legal steps required to make that happen. This could mean that you don’t have to pay the underlying debt and still get to keep the property at issue.

A debt could also be only partially secured. If you owe $10,000 on a vehicle worth only $6,000, the debt is partially secured. It’s secured as to the $6,000 value of the vehicle and unsecured as to the remaining $4,000 of the debt. (See Section 506 of the Bankruptcy Code.) In the right circumstances you would not need to pay the full $10,000 debt and could still keep the vehicle.

Priority Debts

The law has selected some debts to be treated better than others, each for certain specific reasons. For example, child support payments are given many advantages, both inside and outside bankruptcy, because legislatures have decided that paying child support is an extremely high societal priority.

Priority debts are themselves prioritized within their different types. The higher-priority priority debts are treated better than the lower-priority one. Here’s a list of the most common priority debts for consumers or small business owners in order of priority:

  • child and spousal support
  • certain wages and other compensation owed to a debtor’s employees
  • certain (usually more recent) income taxes, and some other kinds of taxes

Priority debts are important in bankruptcy for a practical reason. Often only certain debts get paid, or get paid more than other debts. So a priority debt may get paid in full while other debts get paid little or nothing. We’ll explore how this works in Chapter 7 and Chapter 13 in our upcoming blog posts.

General Unsecured Debts

All debts that are not secured are unsecured debts.  “General” unsecured debts are just unsecured debts that are also not priority debts. So if a debt is not secured and does not fit any of the priority debt types, it’s general unsecured.  

Most people considering bankruptcy have mostly (and sometimes only) general unsecured debts. These include every possible way you can owe a debt. Examples include: most credit cards, just about all medical debts, personal loans without collateral, NSF checks, payday loans without collateral, unpaid rent and utilities, older income taxes, repossessed vehicle balances, most student loans, and other contract or legal claims against you.

Previously secured debts sometimes become general unsecured ones. One example: after a vehicle gets repossessed and sold, any remaining debt is a general unsecured one. Also, previously unsecured debts sometimes get secured. A general unsecured credit card balance can become secured by your home if the creditor sues you, gets a judgment, and records a judgment lien against your home.


Starting next week we’ll show how these different categories of debts are treated in bankruptcy.


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.


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.

Chapter 7 Prevents Judgment Liens on Your Home

November 13th, 2017 at 8:00 am

Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing. 

Recently we went through a list of ways Chapter 7 buys you time when dealing with debts affecting your home. Included was that filing a Chapter 7 case can “stop a lawsuit from turning into a judgment lien.” That judgment lien could turn a debt that you wouldn’t have to pay after bankruptcy into one you would. That’s certainly a result you want to avoid.

Some judgment liens against your home can be “avoided”—or undone– in bankruptcy. Then maybe you wouldn’t have to pay the underlying debt. But some judgment liens can’t be “avoided.” The debt behind such a lien would therefore have to be paid, even after filing bankruptcy. Again, that’s a result you really want to avoid.

In those situations filing a Chapter 7 case before there’s a judgment usually prevents that bad result. Let’s dig into this more to better understand it.

Lawsuits by Conventional Creditors

If you’re thinking about bankruptcy the judgments you mostly likely need to be worrying about are those by creditors. By “creditors” we mean conventional ones like those you might owe for credit cards, medical bills, a repossessed vehicle, personal loans, and such.

Lawsuits by such creditors often don’t leave you with much defense. You concede owing the money you’ve contracted to pay, haven’t paid, so usually (but not always) you have no defense. The creditor will get a judgment by default against you if you don’t respond to the lawsuit in time.

Less Conventional Creditors

But you might also be involved in other kinds of legal disputes potentially resulting in a judgment against you. That could arise from just about anything. A few examples would be:

  • a vehicle accident with a dispute about fault, damages, or insurance coverage
  • an injury to someone on your property that for some reason isn’t covered by your homeowner’s or renter’s insurance
  • a disagreement with a contractor or other service provider on repairs to your home
  • a dispute with family members about the proceeds of a deceased relative’s estate
  • a disagreement with your business’ investor, co-founder, employee, supplier, or its commercial landlord

It’s not unusual for people involved in such disputes to file bankruptcy if such litigation is not going well. They have much financially riding on wining the lawsuit. Then when it becomes clear that’s not happening they desparately need to cut their losses.

Filing Bankruptcy Prevents a Judgment against You

Whether with conventional creditor lawsuits or these other kinds of disputes, the timing of your bankruptcy filing is crucial. It has to be filed in time to prevent the lawsuit from turning into a judgment, and then into a judgment lien against your home.

So when dealing with a conventional creditor lawsuit, your bankruptcy lawyer generally needs to file your Chapter 7 case in bankruptcy court before your deadline to file the formal answer to the creditor’s complaint in the state court. (There are also likely other more expensive ways to prevent a default judgment from being entered against you.)

When dealing with ongoing litigation, talk with your lawyer about when you’d have to file bankruptcy to prevent entry of a judgment.

Judgments and Judgment Liens

State laws differ about what it takes for a creditor who gets a judgment against you to turn that into a judgment lien against your home. This may take an extra procedure. Or it may happen simultaneously with the court’s entry of the judgment. Again, talk with your lawyer. But in most situations, the judgment lien can happen very fast after the judgment, if not at the same time. So, for practical purposes, you’re going to want to file bankruptcy before the entry of the judgment.

Next: Avoidable vs. Unavoidable Judgment Liens

If you already have a judgment lien against your home, don’t despair. As we said in the first couple paragraphs, bankruptcy allows you to “avoid” some judgment liens against your home. In our next blog post we’ll distinguish between judgments that can and can’t be “avoided”—or undone—in bankruptcy.


Execution Liens, Judgments on Nondischargeable Debts

January 11th, 2017 at 8:00 am

Execution liens on your home are like judgment liens, “avoidable” in bankruptcy. But only if the underlying debt can be discharged.  

The last three blog posts have been about judgment liens on your home. We explained the trouble they cause, how bankruptcy can often get rid of them, and gave examples of both. Today we mention a couple of important twists to round out this topic of judgment liens.

Judgment Liens and Execution Liens

We’ve talked about getting rid of judgment liens without saying anything about execution liens.

“Execution lien” is a less commonly heard term. It’s used more often in certain states.

An execution lien usually arises when a creditor sues you, gets a judgment (usually because you don’t respond to the summons), then the creditor gets a writ of execution in order to collect on the judgment, and finally records the execution wherever your deed is recorded. 

The details of this procedure vary from state to state. For example, in some states the entry of the judgment itself creates a lien on real estate in that county. In other states this depends on the court in which the judgment was obtained, sometimes requiring a separate docketing of the judgment in the land records. Or sometimes the creditor needs a recorded writ of execution after getting a judgment, in order to get a lien on your home.

Execution Liens are “Judicial Liens”

Simply put, whether a lien placed on your home is called a judgment lien or an execution lien likely does not matter for purposes of getting out from that lien in bankruptcy.

We have been using the term “judgment lien.” But the actual broader term used in the Bankruptcy Code is “judicial lien.” The U.S. Bankruptcy Code says that “the debtor may avoid [that is, undo] the fixing of a lien… if such lien is—a judicial lien.” Section 522(f)(1)(A).

A “judicial lien” is a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Section 101(36) of the Bankruptcy Code. That broad language makes quite clear that it doesn’t matter whether you are dealing with something called a judgment lien or execution lien. Either one is a judicial lien which can potentially be “avoided” from the title of your home.

See our post of last Friday about how that’s done.

Judicial Liens on Non-Dischargeable Debts

In that same recent blog post, we gave a list of conditions for “avoiding” a judgment/ judicial lien. But we didn’t specifically list one crucial condition because we figured it was self-explanatory. However we realize this needs to be made clearer.  

That one additional condition is that the debt which is the basis for the judgment against you must be a debt that can be discharged—written off—in bankruptcy. If you can’t discharge the underlying debt that led to the judgment, you can’t “avoid” the judicial lien resulting from it.

Take the example of a debt for a criminal restitution. A court orders somebody to pay $30,000 in restitution because of his or her embezzlement. The court would enter a criminal judgment including that restitution amount. That judgment would become a judgment lien on that defendant’s real estate. Criminal restitution can never be discharged in bankruptcy. Because this debt underlying this judgment lien can’t be discharged, the resulting judgment lien cannot be “avoided” in bankruptcy.

Non-Dischargeable Debts

This could be the topic of many blog posts. But in general there are two categories of debts that are not discharged—written off—in bankruptcy. Because the underlying debt is not discharged, the resulting judgment lien on real estate cannot be “avoided”—removed.

First, certain debts are automatically not discharged. They include the following:

  • many but not all student loans
  • child support or spousal support obligations
  • divorce property settlements (except under Chapter 13)
  • criminal fines, costs, and restitution
  • some but not all income taxes and other taxes and governmental debts
  • many but not all homeowner association fees and assessments
  • death or injury caused by driving under the influence of intoxicants

Second, there are other kinds of debts that may not be discharged, but only if the creditor files an objection. It’s not automatic. In fact, if the creditor does not object to a discharge, these kinds of debts ARE discharged in bankruptcy.  The creditor must file a formal objection in bankruptcy court, do so within quite a short timetable, and then the court decides whether that the particular debt meets certain conditions.  The kinds of debt that MAY not be dischargeable include the following:

  • injury to person or property caused by a willful and malicious act, such as an assault
  • fraud used to get money, goods or services, such as by lying on a credit application or bouncing a check
  • fraud committed while acting as a fiduciary, such as by embezzlement or theft while being an executor, trustee or guardian

If the judgment does not relate to these categories, and the creditor doesn’t successfully object to discharge, then in bankruptcy you can discharge the debt underlying the judgment. If the underlying debt can be discharged, then the resulting judgment lien could also be “avoided”—permanently removed—from your home’s title.


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.


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.


The Dangerous Judgment Lien

January 4th, 2017 at 8:00 am

A judgment lien effectively converts a debt that was secured by nothing into one secured by your home. 

Has a creditor sued you and gotten a judgment against you? If so, and you own a home, most likely there is now a judgment lien against your home.

The Dangerous Judgment Lien

What’s a lien? It attaches an asset you own to a debt you owe, and secures the debt with it.

judgment lien, in most states, attaches your home to the amount you owe to the judgment-holding creditor. Usually without your consent, your home then secures that debt.

A judgment lien gives the creditor huge leverage to make you to pay the entire debt. Not only pay the debt, but also the creditor’s attorney fees, its other costs for getting the judgment against you, and its constantly accumulating interest.

If you try to sell or refinance your home, the judgment lien forces you to pay the judgment.  That debt has to be paid—usually in full—out of the sale or refinancing proceeds. It comes straight out of money you would have otherwise received. A judgment lien can sometimes also prevent you from being able to do the sale or the refinance altogether.

Under some circumstances and in many states, the creditor can foreclose on the judgment lien even if you don’t sell or refinance the home. You could lose your home if you don’t come up with a way to quickly pay off the judgment amount.

Stealth Judgment Liens

Usually you know it when you’ve been sued by a creditor. You are served with papers that make that clear.

But sometimes you are not personally served and don’t know about the lawsuit. Or you may receive papers but don’t read them closely. Or you realize you’ve been sued but then nothing seems to happen and you don’t find out what did in fact happen with the lawsuit.

If you don’t respond by the deadline stated in the papers you receive, the creditor automatically wins the lawsuit. A judgment is entered against you in the amount the creditor sued you for. A judgment lien is then placed on your home in that amount plus the creditor’s often-substantial costs.

If you are not paying attention, you could easily have no idea that the court entered a judgment against you. Even if you are paying close attention, you are not necessarily informed that a judgment has been entered. And even if you do know about the judgment, you may not find out that your home now has a lien on it in the amount of the judgment.

Judgment Liens after Settlement

You could also have a judgment lien on your home even if you closely cooperated with a creditor. Have you ever settled with a creditor, agreeing to make monthly payments on a debt? The settlement could have included the creditor’s right to enter a judgment against you. That way it doesn’t have to go through the costs and delay of suing you if you don’t make the agreed payments.

Even if a judgment was not entered at the time of the settlement, it’s standard practice that one is entered automatically if you fail to make the agreed payments on time.

These kinds of settlements can be entered into whether or not the creditor filed a lawsuit before the settlement. So, if you’ve entered into a settlement with a creditor, you could easily have a judgment lien on your home. And that could be true even if you are current on your settlement payments.

The Limitations and Benefits of Bankruptcy

Bankruptcy writes off (“discharges”) most kinds of debts, but is generally not very good at getting rid of liens. Liens are creditors’ rights against your property, rights that the bankruptcy law generally respects. For example, if you want to keep your vehicle in bankruptcy, you generally have to pay off its lienholder.

But in many situations you CAN get rid of a creditor’s judgment lien on your home. We’ll show in a couple days in our next blog post.


Debt Secured by Judgment Lien Can Often Be Turned into an Unsecured Debt

August 15th, 2016 at 7:00 am

A judgment lien turns an unsecured debt into one secured by a lien on your home. Bankruptcy can undo that, and write off the debt.


Very Different Treatment of Unsecured Debts and Secured Debts

A couple blog posts ago we discussed how differently unsecured and secured debts are treated in bankruptcy.

Most debts that do not have a “lien” on any of your property or possessions are legally, permanently written off in bankruptcy. However with secured debts the lien that the creditor has in your asset is NOT USUALLY written off or affected in any way in bankruptcy. That means the creditor can take collection action against your asset through that lien after the bankruptcy case is completed. As a result usually you have to pay the debt.

But in certain situations bankruptcy CAN turn a secured debt back into an unsecured debt. We focus on another one of those situations today.

Erase a Lien in Bankruptcy is Extraordinary

It’s important to realize how extraordinary it is to be able to turn a secured debt into an unsecured one. It’s unusual even in bankruptcy. Most liens cannot be erased. Instead, after bankruptcy they often have to be paid either in full or in part.

So it’s quite special to be able to erase a judgment lien, write off the debt, and not pay anything.

Erasing a Judgment Lien

But this can only be done under certain circumstances. The good news is that for practical reason 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 a judgment lien, the liens must “impair your homestead exemption.” (See Section 522(f) of the Bankruptcy Code).

An Example of “Impairing Your Homestead Exemption”  

Here are the conditions that have to be met, applied to a hypothetical example.

  1. The judgment lien that is being gotten rid of must be attached to your “homestead.” That is legally defined differently in different states but generally means the place where you live. So assume you live in a home titled in your name, with a mortgage—that’s your homestead. In our example it’s worth $200,000 with a $180,000 mortgage, and so has equity of $20,000.
  2. The equity in your homestead must be protected by a “homestead exemption.” State and federal laws provide different amounts of protection for your home. It’s usually described as a certain maximum dollar amount of equity. In our example assume a homestead exemption of $30,000. Since that’s more than your $20,000 in equity, all of your equity is protected by the homestead exemption.
  3. The lien being removed 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.” And that judgment lien can’t be based on child or spousal support, or a mortgage foreclosure. In our example you’ve been sued by a collection company for an unpaid $15,000 medical bill. You knew you owed the money so you didn’t respond to the lawsuit. So a judgment was entered against you, which turned into a judgment lien against your home. This is the kind of “judicial lien” that could potentially be removed in bankruptcy.
  4. That judgment lien must “impair the homestead exemption” to be able to get rid of it through bankruptcy. This generally means that the judgment lien attaches to equity that is protected by the applicable homestead exemption. In our example the $15,000 judgment lien attaches to the $20,000 in equity in the home.  ALL of that $15,000 of equity is included in the equity that is protected by the homestead exemption. So, the ENTIRE $15,000 judgment lien would be removed by filing bankruptcy. The underlying medical debt would be written off. You would owe nothing and the judgment lien would be gone.


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