Avoiding Judicial Liens in Chapter 7 Bankruptcy

Many times debtors who file Chapter 7 bankruptcy have judicial liens against real estate or personal property they own. A judicial lien is a non-consensual lien (meaning one that you didn't voluntarily agree to, like a mortgage) that has been placed against the property as a result of a lawsuit judgment against the debtor.

A judicial lien can’t be discharged as an unsecured debt in Chapter 7 because it is officially a secured debt, and the lien must be settled before the property can be sold or refinanced. However, in certain circumstances, a Chapter 7 bankruptcy debtor can “avoid” or cancel out a judicial lien with approval of the bankruptcy court.

Not every bankruptcy debtor can avoid judicial liens in this way. Whether a lien can be avoided depends on several factors. If all the following conditions apply to a judicial lien, then it can most likely be avoided:

  • A court issued a judgment of money against a debtor as the result of a lawsuit and resulted in the lien against the debtor’s property
  • The debtor can claim an exemption on at least a portion of equity in the property
  • If the property were to be sold the lien would consume some or all of the exempt equity – or, in bankruptcy jargon, the lien would impair the exemption

Who Can Avoid a Judicial Lien?

Any Chapter 7 debtor with liens against property that satisfy the above requirements should request to have the lien avoided. If all of a debtor’s equity in the attached property qualifies for exemption, the court is likely to avoid the lien entirely and the debtor won’t have to pay any portion of that debt.

If the entire value of the property qualifies for exemption and there is no mortgage or loan against the property, then the debtor will own it free and clear once the lien is avoided. Even if the lien is only partially avoided, as happens when not all of a debtor’s equity in the property is exempt, it can be useful to reduce the total amount of debt remaining after the bankruptcy discharge.

Even if a debtor is not interested in keeping the property against which the liens are placed, it’s still a good idea to request the liens be avoided. If the court agrees to avoid the liens, then the debtor can sell the property and keep the equity portion of the proceeds or apply it against other debts.

How to Request Avoiding a Judicial Lien

A Chapter 7 debtor with judicial liens he or she wants to avoid may first claim the property in question as exempt from liquidation on the Schedule of Exemptions required for every bankruptcy case. To do this, the property is listed on the Statement of Intention and the column titled “Property is Claimed as Exempt” is check-marked. Then the debtor, or preferably his or her bankruptcy attorney, files a motion requesting that the lien be avoided. Requirements for a motion to avoid a judicial lien can vary from district to district, so it is best to have the motion drafted and filed by an attorney familiar with the rules of the district being filed in.

In general, all bankruptcy laws and rules are complex and difficult to fully understand for anyone not trained in bankruptcy proceedings. Failure to fully comply with rules, meet statutory deadlines or take advantage of opportunities provided by bankruptcy laws can result in dismissal of a bankruptcy, unintended results or unsatisfactory outcomes and unnecessary frustration.

To ensure your bankruptcy case goes smoothly and achieves all that you intended, it’s best to have an experienced bankruptcy attorney represent you in all bankruptcy proceedings and negotiations. In Maryland, bankruptcy attorney John Burns and his firm can assist in forming an effective bankruptcy strategy and ensure your case goes according to plan. Call our office at 301-441-8780 to schedule an appointment or email me at jburns@burnsbankruptcyfirm.com.

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