Unless some action is taken to affect a creditor’s lien, its lien will pass through bankruptcy unaffected, and your creditor will have the right to enforce the lien after the conclusion of the case. Therefore, it is important to take action within the bankruptcy case to eliminate certain liens.
There are two common ways that liens can be avoided in bankruptcy: (1) avoiding a lien against certain personal property; and (2) avoiding a judgment lien.
A debtor may avoid a nonpossessory, non-purchase-money liens against personal property to the extent that the lien impairs an exemption claimed by the debtor. A nonpossessory lien is one where the creditor does not keep the property you put up as collateral. Therefore, if the lien holder is not in possession of the collateral, their lien is a nonpossessory lien. A non-purchase-money lien means that the money loaned to you was not used to purchase the collateral secured by the loan. Therefore, if the collateral was already owned by you at the time that you obtained your loan, it is a non-purchase-money loan.
You can also avoid judgment liens to the extent the judgment lien impairs an exemption. When a judgment is entered against you, it creates a lien on any real estate and any personal property you own. Therefore, if you have any judgments against you, you must avoid those judgment liens in your bankruptcy case, or the liens will still attach to your property after bankruptcy.
Keep in mind that you can only avoid a judgment lien to the extent that it impairs an exemption. Therefore, if a lien only partially impairs an exemption, it can only be partially avoided, and not cancelled completely. For example, lets say that you own real real estate valued at $150,000.00, with a mortgage payoff of $100,000.00, an exemption of $10,000.00, and a judgment lien in the amount of $5,000.00. In this situation, the judgment impairs the exemption to the full extent of the lien and can be wholly avoided as to the real property. Therefore, the judgment lien is fully eliminated and the judgment creditor cannot realize any payment from the sale of your home after bankruptcy. Contrarily, if the judgment lien was in the amount of $20,000.00, the judgment lien could only be partially, but not fully, avoided. Therefore, if your home sold after the conclusion of the bankruptcy for $120,000.00, the creditor could still take away $10,000.00.
Whether the lien can be avoided in full often depends on the value of your home. In order to fully utilize the power of lien avoidance, it may be necessary to retain a real property appraiser to give a true value of your home.