A lien is essentially a debt that is attached to your home or property. When the debt associated with the lien is removed through bankruptcy, the lien itself is not automatically removed. However, additional steps can be taken to remove the lien from your property in most circumstances. The type of lien will determine whether or not it can be removed through your bankruptcy.
Consensual Liens
The primary type of consensual lien is a mortgage. Consensual liens, like mortgages, can only be removed from property if paid in full. Although a bankruptcy will eliminate the personal debt obligation of the debtor, the mortgage/lien remains attached to the property and will not be eliminated via the bankruptcy.
Judicial Liens/ Judgments
Depending on the amount of equity you have, judgments are by far the easiest form of lien to remove from a piece of real-estate. This is done through a legal device called a “lien avoidance motion” which is filed in the bankruptcy court by your attorney. By filing a motion to avoid, the lien will be eliminated as long as the equity remaining in the property after all taxes, judgments, and mortgages are considered is below the exemption amount you are allowed in your jurisdiction. Typically, a married couple is entitled to double the exemption amount. If you are contemplating a motion to avoid a lien, consult with your bankruptcy attorney to determine your eligibility.
A motion to avoid a lien is best filed with the court before your bankruptcy case is closed. There are certain instances where a case can be reopened for the purpose of filing a motion to avoid the lien, but there is no guarantee that this can be done once your case is closed. If you provide the court with accurate, up-to-date proof about the value of the property as well as information on mortgage payoff balances, the court will typically accept your motion, uncontested. It will then grant an Order of the Bankruptcy Court which will officially remove the lien from your property once it is recorded.
Statutory Liens
State income tax, federal income tax, and property tax liens, are the most common form of statutory liens. These typically have to be paid in full before being removed, and will not be completely eliminated by filing for bankruptcy. However, there are some circumstances where they can be at least partially eliminated through bankruptcy given the right circumstances. These cases are quite nuanced, individualized, and complicated and are best addressed by a experienced bankruptcy attorney.
Time is on Your Side
In most jurisdictions, your judgment will expire after a certain period of time passes, unless it is renewed. Once expired, the judgment cannot be renewed. So even if you aren’t planning to file for bankruptcy, if enough time passes, the lien may no longer be on your property when you go to sell it. If you are planning to sell your property and believe it may be burdened by a lien, you should investigate the details of the lien before putting it up for sale. It may be worthwhile to wait to sell until your lien expires.
Free and Clear
By eliminating any liens, your real estate should have a clear title that can be conveyed unencumbered. If you are in the market to sell your home, and have eliminated a lien, you should notify your real estate broker so he or she can ensure that this will not be an issue when transferring the title upon sale. If you still have a lien on your real estate and you are considering selling your home, it is wise to consult with an experienced attorney. It may make sense to file for bankruptcy before selling your home, if the lien can be eliminated.