Options for Dealing With Liens in Bankruptcy
Learn about the ways you can deal with liens on your property when you file for Chapter 7 or Chapter 13 bankruptcy.
If you have liens on your property and file for bankruptcy, you may be able to get rid of them through the bankruptcy. In order to do so, however, you must file motions with the bankruptcy court to get the relief you need. The options available to you depend on:
- the type of bankruptcy you file
- the type of liens you are dealing with, and
- the exemptions you have claimed.
To learn what kind of lien you have, see Types of Liens.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcy is a liquidation bankruptcy. You keep the property that you claim as exempt and everything else is used to pay your creditors. There are limited options for eliminating or reducing liens in Chapter 7. In most cases, you need to pay the secured creditor or surrender the property.
Chapter 13 bankruptcy is a repayment plan for individuals with regular income. There are more options available in Chapter 13.
Options for Eliminating or Reducing Liens
There are basically four methods available to eliminate or reduce liens in individual bankruptcies. In most cases, any portion of a lien that is removed from your property is treated as unsecured debt in your bankruptcy. This generally means it is discharged along with your other unsecured debt.
Bankruptcy law allows you to avoid or remove certain types of liens from property you are claiming as exempt. You can’t avoid liens that secure debts for money you used to purchase the property (purchase money mortgages and car loans) or statutory liens such as mechanics liens (which secure debt for work done on the property). You can use lien avoidance to remove judgment liens. It is available in both Chapter 7 and Chapter 13 bankruptcy.
For more information on lien avoidance, see Avoiding (Getting Rid of) Liens in Bankruptcy and Judgment Liens in Bankruptcy: Can You Get Rid of Them? .
If you have more than one lien on property that you own and the value of the property is not enough to cover all of the liens, you may be able to use lien stripping to remove a lien that is entirely unsecured. It is generally used to eliminate junior (second or third) mortgages or liens on residential property, most often in Chapter 13, where the senior (older) liens exceed the value of the property. In a limited number of districts, it is allowed in Chapter 7. Check with an experienced bankruptcy attorney in your area if you are looking to apply lien stripping in a Chapter 7.
For more information on lien stripping, see How to Strip a Second Mortgage or HELOC in Chapter 13 and Can I Remove Junior Mortgages and Liens in Chapter 7 Bankruptcy.
This is a good option if you have personal property (such as an automobile or furniture) that is subject to a purchase money lien in an amount that is greater than the value of the property. You can redeem your property (or free it from the lien) by paying the secured creditor the current value of the property in a lump sum in full satisfaction of the lien. Redemption cannot be used on real property or to reduce liens securing business loans. It is mainly used in Chapter 7 bankruptcy.
For more information on redeeming automobiles in bankruptcy, see Redeeming a Car Loan in Chapter 7 Bankruptcy.
This could be described as the Chapter 13 version of redemption but it is more versatile. Like redemption, you can satisfy liens by paying the current value of the property. Unlike redemption, you can use cram down on real estate (but not your home) and you do not need to pay the debt in one lump sum. In most cases, the amount is paid to the creditor over the life of the Chapter 13 plan, up to 60 months. Cramdown is available to reduce auto liens but only if you have owned the automobile for more than 910 days (approximately 2-1/2 years).
For more information on cramdown, see How Cramdown Works in a Chapter 13 Bankruptcy Case.
Options to Keep Secured Property Without Eliminating Liens
If you are not able to reduce or eliminate the liens on your property, there are other bankruptcy options which may allow you to keep the property.
Curing an Arrearage in Chapter 13
If you are behind in your payments, you can use Chapter 13 to catch up on the payments. You must be able to pay the back payments, or arrearage, over the life of your Chapter 13 plan (up to 60 months) while also making your current payment. This applies to real estate or personal property (and is often used for mortgage and car loan arrears) and if your payments were scheduled to end before the end of your plan period, you may also be able to restructure the payments to spread them out over the plan.
For more information, see The Chapter 13 Bankruptcy Repayment Plan.
If you are current on your secured debt when you file for Chapter 7 bankruptcy, you can enter into a reaffirmation agreement and continue to make the regular payments. The reaffirmation agreement makes you responsible for the entire debt, as if you had never filed for bankruptcy. Reaffirmation agreements are common for auto loans but generally not required for mortgage debt.
For more information on reaffirming car loans, see Reaffirming a Car Loan in Chapter 7.
Surrendering Secured Property
Surrendering secured property, or giving it up to the secured creditor, is an available option in any bankruptcy chapter. In most instances surrendering the property will resolve the lien issue completely. An exception may be real estate that is in a homeowners or condominium association. The bankruptcy law specifically excludes post-bankruptcy fees due to condominium and homeowners associations from a Chapter 7 discharge.