Eliminating a Judgment Lien During and After Bankruptcy
A Chapter 7 bankruptcy discharge eliminates the debtor’s personal liability for payment of unsecured debt. However, a bankruptcy discharge does not always eliminate a judgment lien. This is because the bankruptcy proceeding serves to discharge a debtor’s obligation to pay the debt which the judgment or other lien secures; it does not affect the lien itself. While it is possible to get rid of the judgment lien by filing a Motion to Remove Lien during the bankruptcy proceeding, that option is not always available. In fact, judgment liens often survive the bankruptcy case, and they need to be dealt with separately.
Eliminating the Lien During The Bankruptcy Process
In some situations, an otherwise valid judgment lien may be avoided during bankruptcy filing1. To remove a lien during bankruptcy, the debtor needs to file a Motion to Remove Lien with the bankruptcy court. Before a debtor may avoid a lien, however, three conditions must be met:
- There was a fixing of a lien on an interest of the debtor in property;
- Such lien impairs an exemption to which the debtor would have been entitled; and
- Such lien is a judicial lien.2
To satisfy the first condition, the debtor must have interest in the property before the lien is fixed. This can be as simple as the debtor owning his home prior to the lien coming to life.
The second condition requires a state exemption statute that provides exceptions for judicial liens, entitling the debtor to an exemption absent the lien. There is also a set of federal exemptions that are listed in the United States Bankruptcy Code. Each state gets to decide if they want to offer the federal bankruptcy exemptions or their own state exemptions. In Idaho, one of the exceptions to avoid a lien is called the homestead exemption.3 The homestead exemption protects the sanctity of the family home against a loss caused by a forced sale by creditors and ensures that insolvent debtors and their families are not rendered homeless by virtue of an involuntary sale of the residential property they occupy.
Finally, the lien must be a judicial lien. A judicial lien is created when a court grants a creditor an interest in the debtor’s personal property, after a court judgment. This type of lien is different from a lien created when you purchase real estate or a mechanics lien created when a builder improves your property. In Idaho, after a judgment has been entered, a creditor can record a certified copy of a judgment which creates a lien upon all of the debtors’ real property in the county where the judgment was recorded, whether owned or after-acquired.4 A judicial lien gives the creditor the right to be paid a certain amount of money from proceeds from the sale of the debtor’s property.
If these three conditions are met the debtor is likely to avoid the lien during the bankruptcy proceeding. However, if this process is not done during the bankruptcy proceeding, the debtor does have other options.
Eliminating a Lien After a Bankruptcy Discharge
There are several ways to deal with a judgment lien that survives a bankruptcy proceeding, including:
- Re-open the bankruptcy case and address the lien.
- In some states, the debtor can file a motion in state court to eliminate the judgment lien.
- Wait until judgment lien expires.
- Pay the creditor.
Re-open the Bankruptcy Case
The debtor could reopen the bankruptcy and file a Motion to Avoid Lien with the bankruptcy court to avoid the lien, claiming that it impairs the debtor’s exemption. The Bankruptcy Code allows a lien to be removed “to the extent that it impairs an exemption to which a debtor would have been entitled in the absence of the lien.”5 In Idaho, homeowners can take advantage of several exemptions, including the Idaho homestead exemption which protects up to $175,000 of home equity from bankruptcy creditors.6
The next step is proving that the lien impairs the exemption. A lien impairs an exemption to the extent that the total of the priority liens and the exemption exceeds the value of the debtors’ interest in the property.
Another necessary element of a successful lien avoidance requires a determination of the operative date to assess whether the impairment exists. In other words, is the impairment of the homestead exemption determined by the date of filing the bankruptcy petition, or the date of filing the motion with the bankruptcy court to remove the lien after the bankruptcy discharge? Several courts have held that the petition date is the operative date to value the homestead.
How does it Work?
Value of home at time of filing the bankruptcy petition: $300,000.
Judgment Lien: $50,000
Homestead Exemption: $175,000
In this example, the $50,000 lien would be avoided because the mortgage and the homestead exemption exceed the fair market value of the home.
However, if the mortgage was $100,000, the creditor would be able to collect a portion of the lien amount since the mortgage and homestead exemption do not exceed the fair market value of the home.
File a Motion in State Court to Eliminate the Judgment Lien
Some states allow you to file a motion in State Court to remove a lien one year following a bankruptcy discharge. Unfortunately, this is not an option in Idaho.
Wait Until the Judgment Lien Expires
Each state has its own law that sets a limitation on how long a lien is valid. In Idaho, a judgment lien will remain attached to the debtor’s property for ten years after the underlying judgment is entered, or if the judgment is renewed, ten years after the underlying judgment is renewed.7 However, continuations can be filed repeatedly. which could make a lien valid indefinitely.
Pay the Creditor
To eliminate a lien, a debtor can always satisfy his debt. Once a debtor has paid off the balance of their debt, they file a Release of Lien Form. Each jurisdiction has its own specific requirements regarding this process. In Idaho, lien waivers are treated just like any other contract.
Debtors should be careful with this approach because if they start making payments towards the lien, they could run into the risk of reaffirming the judgment for the creditor to enforce.
Call Gordon Delic & Associates to Talk With a Bankruptcy Lawyer
Filing for bankruptcy is a complex process, governed by many rules. Handling liens is an especially tricky area. If you are considering filing bankruptcy, Call our bankruptcy attorneys at Gordon, Delic and Associates to ease the process. We have helped countless clients remove liens after bankruptcy. We can give you an honest assessment on your claim for removal. These types of proceedings only happen once so having an attorney who knows what they are doing can make all the difference. Contact us or give us a call at (208) 900-9509 to speak with our team!
- 11 U.S.C. § 522(f)(1)(A)
- In re Bailey, No. 10-02884-JDP, 2011 WL 1576958 (Bankr.D. Idaho Apr.26,2011).
- Idaho Code § 10-1110
- 11 U.S.C. § 522(f)
- Idaho Code § 10-1110