For those who have liens, filing for bankruptcy can be an opportunity to have those liens discharged. In Chapter 7 bankruptcy, also known as total discharge, many secured and unsecured debts are erased and the borrower does not have to repay them. However, it is important to understand what liens are and how they may or may not be treated during the bankruptcy process.
How Liens Work
In general, liens pass through bankruptcy undisturbed, meaning that they remain intact and you must repay them as you are currently doing, unless you bring a motion to avoid them. One reason you may wish to do this is to hold on to a vehicle or your home while continuing to repay the debt. In other circumstances, you may wish to ask the bankruptcy court to invalidate those liens, if it impairs an exemption.
There are several things to keep in mind about these liens:
- If you wish for the lien invalidated during the bankruptcy process, the asset it is attached to is likely to be lost. For example, a lien on a second home may be discharged, but the property will be lost as well.
- In many instances, individuals do not realize they have the lien. This occurs when a judgment passes against an individual before or after bankruptcy and attaches to a property. If you find out later that the lien is in place, you can open the bankruptcy to request to avoid the lien.
- Liens on real estate often become evident during the refinancing of a mortgage, when a title company finds them. These, too, can be discharged during bankruptcy.
In situations where the individual wishes to keep the property, the lien remains intact unless a court determines that the original debt is not secured. This often occurs on second mortgages when the property’s value is not enough to cover the lien value. In addition, if the lien is some type of unsecured debt, a judge can rule that the lien is not valid during the bankruptcy process. In situations where you are unsure of your options, consult an attorney.
Hire an Attorney
In many situations, filing bankruptcy in situations where judgments and liens are in place is best done with the aid of an attorney. The attorney will guide the decisions you make, and help to ensure that any and all liens are discharged or reaffirmed during the bankruptcy process. This protects your interests throughout the process.
