Bankruptcy Liens

According to California law, the general rule states that liens pass through bankruptcy unaffected by the discharge. If you file for bankruptcy under chapter 7, as long as your creditor has a lien on your property, he/she will have the right over that property. At times, you may be able to get rid of a bankruptcy lien upon filing for bankruptcy. However, this will depend on several factors, including the type of lien. The San Diego Bankruptcy Attorney can help you explore the various options of getting rid of a bankruptcy lien. Your ability to get rid of a bankruptcy lien will also depend on the type of property used as collateral. Lien avoidance will also depend on whether the property under lien is exempt. 

Overview of Bankruptcy Liens  

According to California law, the general rule is that lien is not affected by bankruptcy. You cannot be able to eliminate a lien by filing for bankruptcy. There are two main ways of creating a lien; through an agreement and the law.  Creditors may place a lien on a property they may have considered as collateral when granting you a loan.  The most common forms of properties used as collaterals include personal properties and real estate.

For a lien created through an agreement, there is consent between you and your creditors. For instance, a mortgage is a good example of a lien that may result from a contract between you and the creditor. The creditor agrees to give you a loan to acquire a house. On the other hand, you agree to provide the creditor with lien known as a mortgage on your home.  If you fail to make payments as agreed, the creditor will have the right to sell off your house and settle all the outstanding debts. 

A lien may also arise by law whereby you do not have to agree or even be aware of the lien. An excellent example of a non-consensual lien is a tax lien. The IRS has a legal right to lien your property if you fail to make the necessary federal tax payments. If you fail to pay the outstanding taxes, the IRS has the right to dispose of your property and use the proceeds to clear the outstanding tax liability.  If a creditor goes to court and seeks judgment against you, this may create a non-consensual lien on your property; this is a judgment lien.

Types of Liens

To effectively deal with a lien in bankruptcy, it is essential to know the type of lien that applies to your property.  A creditor may have either a consensual or non-consensual lien on your property. A non-consensual lien that you do not agree to may be very hard to comprehend. Usually, bankruptcy liens fall under several categories. They may include voluntary liens, statutory liens, and judicial liens, among others. 

  1. Voluntary Lien

You may decide to give a lender an interest in your property. In this case, a voluntary lien arises. For instance, if you obtain a mortgage to acquire a house, the house will serve as security for the loan. A voluntary lien may also arise between you and a car loan lender. Through a voluntary lien, you induce a creditor to lend money to you as the creditor is assured of recovering his/her money.  The creditor is aware that if you are unable to make loan payments as agreed, he has the right to seize the property used as collateral and sell it to recover his money. 

  1. Non-Consensual Liens

Similar to a voluntary lien, a non-consensual lien serves as an interest in your property granted to a creditor to secure a loan that you owe.  The main difference is that a creditor obtains a non-consensual lien without your consent or even your knowledge.  A non-consensual lien might arise if you fail to honor payments for a property even if you did not know that the property was secured. 

A non-consensual lien may be statutory or judicial. The law creates a statutory lien while a judicial lien results from court action.  Federal or state law can create a statutory lien.  The affected property will vary depending on the property that the lien attached to. Some of the leading forms of statutory liens include the following:

Landlord Liens

Landlord liens mainly apply to businesses or commercial properties. The lien will allow a landlord to recover unpaid rent in case a tenant files for bankruptcy. A landlord may have a lien on the business inventory or the business machinery if a tenant fails to pay the outstanding rent. Before exercising his/her lien rights, a landlord has to meet some very strict requirements. 

Mechanic Liens

If a contractor or service provider conducts some work on your property, and you fail to pay for it, the contractor may seek a mechanics lien on your property.  For instance, if you have the roof of your house replaced or repaired, then you fail to pay for it; a mechanics lien may result. Some statutes govern the type of work that may qualify for a mechanics lien. There are also some statutes and measures for you as the property owner to contest the lien if the contractor did not do the work as he/she states. You may also object to the lien if the contractor's service was not quality and did not meet your expectations.  There are some strict timelines and deadlines for enforcing a mechanics lien.

Tax Liens

State and federal governments may grant tax authorities (IRS) liens on your property to help recover unpaid taxes. Usually, tax liens are attached to properties for which rent is owed. Some tax liens like unpaid federal taxes will attach and affect every property that you own, including personal property and real estate. 

  1. Judicial Liens

A creditor can only acquire a judicial lien through court action. A judicial lien does not qualify as a statutory lien but is a good example of a non-consensual lien. A creditor goes to court to seek a judicial lien against a debtor. The state or federal law forms the basis for judicial liens.  Some examples of judicial liens may include the following:

Garnishment or Attachment Liens

This lien involves service a garnishment or an attachment order to anyone holding your money. This lien comes in handy in seizing your bank accounts or your wages. This lien may act as a collection method once a creditor has filed a judgment against you. The lien will be effective until the court makes a decision whether to allow the creditor to use your money or not. In the case of a wage garnishment, the lien may stay in place until the creditor recovers all his money.

Child Support Lien

If you have past due court-ordered child support payments, the custodial parent may place a lien on your property. This type of lien is known as a child support lien.

In some instances, a lien occurs automatically; however, in most cases, a creditor has to undertake some legal steps when placing a lien. One common legal step is seeking the intervention of a court of law. 

What Happens to Liens Under Chapter 7 Bankruptcy?

Bankruptcy may work very well to wipe out many types of liens. However, things may get tricky, especially if the lender has a lien attached to a property. In most instances, a creditor's lien will survive chapter 7 bankruptcy. If your bankruptcy case closes and the lien is still unpaid, the creditor will still be able to recover the property used to secure the debt.

If the creditor sells your property and the proceeds are less than the money needed to clear the outstanding loan, a deficiency balance arises. A chapter 7 bankruptcy will wipe out a deficiency balance. In some states, the law prohibits deficiency balances on certain forms of transactions. It may be complicated to grasp what actually happens to liens under chapter 7 bankruptcy. 

It is important to note that Chapter 7 bankruptcy may help you evade your responsibility to pay a secured debt such as a mortgage. Filing for bankruptcy will help wipe out even the deficiency balance. However, unless you pay what you owe in full, you will not be able to keep the property. There are two major parts of a secured transaction:

The Borrower's Obligation to Pay the Creditor- As a borrower, it is your legal duty to pay the creditor what you owe. After you file for bankruptcy in Chapter 7, the bankruptcy will wipe away your liability to pay the debt. This is as long as the debt qualifies for bankruptcy discharge. The creditor will no longer be able to sue you to recover the debt. The creditor will also not be able to use a judicial lien to garnish your wages or extract money from your bank account.

The Ability and the Right of the Creditor to Use Lien to Recover Collateral- Your creditor holds the right to dispose of the asset used as collateral and pay off the remaining debt. If you do not pay the debt, the lien gives the creditor the right to recover the property. If the property is not available, the creditor can sue you for the value of the property.  Bankruptcy in itself is not able to eliminate a lien on the property. Even if you give the property to another person, the lien will still hold.

For example, you may purchase a freezer from the local store. You sign a contract, and you agree to pay for the freezer within 12 months. The contract clearly outlines that the creditor (store) has security interests in the freezer. You agree that if you fall behind in payments, the store has a right to recover the printer from you. This is a secured debt; you must repay the debt. The obligation to repay the debt is your liability. The legal right of the store (the creditor) to recover the asset is the lien.  If you file for bankruptcy under chapter 7, the bankruptcy will relieve you of your personal liability. However, the bankruptcy will not affect the right of the creditor to repossess the freezer.

Lien Perfection

For a creditor's lien to hold during a bankruptcy process, the creditor must perfect the lien. Perfection entails recording the lien with the relevant local or state records office. For a real estate lien, the creditor will have to record the lien with the relevant authorities at the place where the property is located. 

Should You File for Bankruptcy Under Chapter 7?

If you cannot get rid of a lien by filing for bankruptcy, is it necessary to file for bankruptcy at all? Shouldn't you just let your house or your vehicle go through repossession or foreclosure? It is beneficial to file for bankruptcy as it will relieve you of your personal liability or your obligation to pay.  You will even get relief from paying the deficiency balance. You may escape tax obligation assessment by filing for bankruptcy. In the case of a foreclosure, if the creditor forgives you the deficiency balance, the forgiven debt will count as income for tax purposes. This may lead to an increase in your tax obligation, making you pay hefty taxes.

Avoiding Liens in Bankruptcy

Under Chapter 7 bankruptcy, it is possible to avoid or get rid of a judgment lien. A judgment lien may apply to a property such as your house or your motor vehicle. You can avoid a non-consensual judgment lien as long as some conditions hold. The conditions are as follows:

  • The lien must have resulted from a judgment issued by a court particularly a money judgment
  • It must be evident that you qualify for exemption in some of your equity in the property.
  • If the property was sold, the lien would lead to loss of part or all of the exempt property.

As long as the three conditions apply, it is possible to get rid of judgment lien from any property inclusive of vehicles and real estate. 

Is It Necessary to Avoid Judgment Liens?

If lien avoidance is available, you should take advantage of it. Especially if you can totally wipe out a lien, you should go for lien avoidance. At times, you may not be interested in keeping the property used as collateral. However, after getting rid of the lien, you can sell the collateral property and channel the money to other uses. 

It is advisable to get rid of lien on the property that is totally exempt. If you do this, the lien will be totally wiped out, and you will be the real owner of the property without having to make any payments to the creditor.

You may also seek lien avoidance for partially exempt property. However, you will still have to clear the remaining amount of debt after lien avoidance. 

If you compromise on the value of lien through lien avoidance, the creditor may demand the remaining lien amount in full (lump sum). However, some creditors may still be willing to allow you to make installment payments for the outstanding lien amount.

While filing for bankruptcy, most people do not realize that they have a lien on their property, especially if a non-consensual lien exists. In addition, most people do not realize that they can successfully eliminate liens on their properties. At times, it may be hard to eliminate the lien on a property if you have no exempt equity in the property. At the time of filing for bankruptcy, you may not have exempt equity on a property. However, with time, you may gain exempt equity in a property; you can always reopen your case and seek lien avoidance. 

Can You Still Avoid Lien if You Have no Equity in a Property?

Some courts may allow debtors to avoid a lien even if the debtor has no equity in the property, although this is a rare occurrence.  However, if a creditor places a lien on your house or other property, you should still seek the services of a bankruptcy attorney even if you have no equity in the property.  The attorney will advise you on whether it is possible to lift the judgment lien. 

Other Ways of Avoiding Liens

You can get rid of lien on your property by requesting the court to remove the lien.  Before granting your request, the court will carefully consider the type of property on which the lien is attached.

You can also avoid a lien by clearing or paying off the debt. If you successfully pay off or clear the outstanding lien, the creditor may agree to lift your lien. To release your judgment lien, the creditor will have to submit the release to the same authorities who effected the lien placement. Once the lender releases the lien on your property, you are free to do as you wish with the property. You may wish to sell, transfer, or trade the property to other parties. 

You can also get rid of a lien by surrendering the property back to the creditor. This is the easiest way of dealing with a creditor's lien on a property. Chapter 7 bankruptcy gives you the opportunity to surrender the secured property back to the lender.

How do you go about surrendering your property? You have to start by informing the court of your intention to surrender the property. You can outline this intention in your bankruptcy papers. Upon surrendering, the law does not require you to deliver the property to the creditor physically. The creditor will come for the property (if the property is movable).  If the creditor fails to come for the surrendered property and a trustee fails to claim the property, you can keep the property. You can surrender property if you do not want to keep it or if you cannot afford to pay for the property. 

Find a San Diego Bankruptcy Lawyer Near Me

There are several ways of getting rid of a bankruptcy lien. You can always choose the option that suits you best. If you are seeking to get rid of bankruptcy liens, the San Diego Bankruptcy Attorney can assist. Contact us at 619-488-6168 and speak to one of our attorneys today.

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