Releasing Liens in Bankruptcy: Lien Avoidance

You can eliminate certain types of liens in bankruptcy.

by: , Attorney

A bankruptcy discharge does not automatically eliminate liens on your property. Whether you can avoid a lien in bankruptcy depends on:

  • the type of lien
  • the value of the property
  • your exemptions, and
  • whether you are filing for Chapter 7 or Chapter 13 bankruptcy.

Avoiding Liens in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, you can avoid certain types of liens if they impair your bankruptcy exemptions. Chapter 7 bankruptcy allows you to remove the following liens from your property if they impair an exemption you would otherwise be entitled to:

  • judicial liens (meaning a lien that arises out of a court judgment), and
  • nonpossessory, non-purchase-money liens on certain assets such as household goods and furnishings, clothing, jewelry, and tools of your trade (up to $6,225).

But keep in mind that you cannot avoid statutory liens (such as a tax lien) or consensual liens (such as a mortgage) on your home or your car in Chapter 7 bankruptcy. (To learn more, see Can Bankruptcy Remove a Statutory Lien?)

Also, simply filing for Chapter 7 bankruptcy does not get rid of liens. To avoid a lien in Chapter 7 bankruptcy, you must file a motion with the court and obtain a court order.

Avoiding Liens in Chapter 13 Bankruptcy

If certain conditions are satisfied, you can reduce the principal balance of some liens through a cramdown in Chapter 13 bankruptcy. The most common example of this is a car loan cramdown that reduces your loan balance to the value of the car. But you can also cram down liens on other personal property as well as mortgages on rental or investment properties (but not your principal residence). (For more information, see Cramdowns in Chapter 13 Bankruptcy.)

In addition, if you have a wholly unsecured second mortgage or other junior lien on your house (including your principal residence), you can get rid of it through a process called lien stripping in Chapter 13 bankruptcy. When you strip a junior lien, it is treated as an unsecured debt (like medical bills or credit cards) in your bankruptcy.

Upon completing your repayment plan and receiving a discharge, the creditor is required to remove its lien from the property. However, to strip the lien, the balance of your first mortgage or other senior lien must exceed the value of the property.

Example: Joan owns a house worth $300,000. She has a $325,000 first mortgage and a $75,000 second mortgage on the property. Because her first mortgage balance exceeds the value of the house, her second mortgage is wholly unsecured. If Joan files for Chapter 13 bankruptcy, she can get rid of her second mortgage through lien stripping. When she completes her bankruptcy and obtains a discharge, the second mortgage will be extinguished and only the first mortgage lien will remain on the house.

To learn more, see Removing a Second Mortgage in Bankruptcy.

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