Judgment Liens in Bankruptcy: Can You Get Rid of Them?
In some situations, you can get rid of (avoid) judgment liens in Chapter 7 bankruptcy.
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A judgment lien occurs when a creditor sues you, gets a judgment against you, and files a lien against your personal property to satisfy the judgment. You can avoid judgment liens in a Chapter 7 bankruptcy under the right circumstances.
What is a Judgment Lien?
A judgment lien is a lien that attaches to personal property after someone obtains a money judgment against you. The lien allows the judgment holder to take your property and sell it to satisfy the judgment.
Example. John owes $4,000 to Bank and stops paying on the loan. Bank sues John for the money, and the court enters a judgment against John for $4,000. Bank files a judgment lien against all John's personal property, including his furniture, his appliances and his collection of vintage baseball cards. Bank can send a sheriff to John's house to take that property and sell it to satisfy the debt.
Avoiding Judgment Liens in Chapter 7
If you file for Chapter 7 bankruptcy, you can get rid of judgment liens on your property through a process called lien avoidance. You can avoid a judgment lien if all of the following three conditions are met:
The lien is the result of a court-issued money judgment. The lien must stem from a judgment a court entered against you in favor of a creditor who sued you for money owed.
You could exempt the property in bankruptcy. Bankruptcy laws allow those who file Chapter 7 to exempt certain property from the bankruptcy estate. For more information about exemptions in bankruptcy, read our Bankruptcy Exemptions topic.
The lien would impair your exemption. If you could have exempted equity in your property but the lien reduces the amount of equity you could have exempted, the exemption is impaired and you can avoid the lien.
Example. Credit Union has a $5,000 judgment lien on Lisa's car. Credit Union procured the lien by suing Lisa for money she owed and obtaining a judgment against her in court. Lisa's car is worth $5,000. Lisa is able to exempt the entire value of her car using the motor vehicle exemption and the wildcard exemption available in her state. The lien is avoidable.
Partial Lien Avoidance
Judgment liens can be avoided in full or in part, depending on your exemptions. If the property is worth more than you can exempt, the lien will still exist to the extent that you cannot exempt the liened property.
Example 1. Lender has a $3,000 judgment lien against Abigail. The lien is attached to Abigail's jewelry, which is worth $8,000. Abigail files Chapter 7 and is able to exempt $6,000 of the value of her jewelry, leaving $2,000 nonexempt. Abigail can avoid $1,000 of Lender's lien, leaving a lien in place worth $2,000, which Abigail will have to pay back if she wants to keep her jewelry.
Example 2. Bank has a $10,000 judgment lien attached to Andy's car. Andy borrowed money to buy the car; he still owes $5,000 on his car loan, which is also a secured loan. The car is worth $20,000. The total equity is therefore $5,000. Andy files Chapter 7 and agrees to repay his car loan and keep the car. Without the judgment lien, the equity in the car is $15,000. Andy is able to exempt $7,000 of that equity, leaving $8,000 nonexempt. The judgment lien will be reduced to $8,000, and Andy will have to pay that amount back.
How to Avoid a Judgment Lien
Your Statement of Intention in Chapter 7 must list all secured debts, including judgment liens, and you must notify the court whether you intend to repay these debts and keep the liened property or surrender the property and discharge the debts. There is an option on that form called "property claimed as exempt," which you must check if you want to avoid the lien.
You must then file a motion with the court requesting that the lien be avoided. If no one responds, the court will enter an order avoiding the lien. If the creditor files a response, the court will hold a hearing at which you can produce evidence that the lien is avoidable. The court will then enter an order either avoiding the lien or leaving the lien intact.
Once you have a court order avoiding the lien, the lien is gone forever -- after your bankruptcy is closed and discharged, the property is free and clear of the judgment lien.