Usually you can’t change a secured debt into an unsecured one, even in bankruptcy. But you often CAN remove a judgment lien from 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.