How Do I Get a Lien Off a Title After Bankruptcy?

Many people assume that if you can eliminate or "discharge" a debt in bankruptcy, you can also remove any property liens associated with the debt. However, that's not the case. Filing for bankruptcy won't automatically remove liens. You must take action. Even then, most liens don't go away in bankruptcy.

When Can You Remove a Lien After Bankruptcy?

You can remove a lien after bankruptcy in two situations—if you fully paid the creditor but the lender didn't forward new title documents or if you forgot to ask the bankruptcy court to remove an eligible "judgment lien."

In both situations, the simplest strategy would be to ask the lender to remove the lien. If unsuccessful, a bankruptcy lawyer can help you file a lien removal motion with the bankruptcy court. (F.R.B.P Rules 9013, 9014.)

If you aren't sure whether you have the right to remove a lien, keep reading to learn how the two qualifying situations can arise.

When You've Paid the Creditor

If, during your bankruptcy case, you fully paid for a home, car, or other property pledged as collateral, you own it. Perhaps you finished making car payments, paid off a mortgage, or stripped a junior mortgage in Chapter 13 bankruptcy during the three to five years required to complete a Chapter 13 plan. Or you might have paid off a car loan in Chapter 7 using the "redemption" procedure.

In these instances, you're entitled to a title unencumbered by a lien. If you didn't receive it, the lender will likely provide it to avoid responding to a bankruptcy motion.

When It's a Judgment Lien

Many types of liens exist, but you can't get out from under most in bankruptcy without paying off the associated debt. However, a judgment lien can be an exception.

A creditor obtains a judgment lien by winning a debt collection lawsuit and recording the money judgment in the recorder's office or state agency. Additionally, in some states, a trial win automatically gives the judgment creditor a lien against the debtor's personal property, which is everything other than real estate.

A bankruptcy filer can remove a judgment lien to the extent that the lien prevents or "impairs" the debtor's ability to protect property using bankruptcy exemptions. Bankruptcy exemptions are the laws that allow filers to protect particular property in bankruptcy.

It's not unusual for the filer not to know a lien exists or be unaware of the process. In most cases, the filer exempts the property in the bankruptcy paperwork in an ordinary manner, which keeps the property safe in bankruptcy. The lawsuit judgment is listed as a debt, eliminating the filer's responsibility to pay.

However, the lien removal process involves filing a motion with the bankruptcy court—it doesn't happen automatically. The bankruptcy judge must review the debtor's property and exemptions and decide whether it's appropriate to remove the lien fully or partially.

If you believe you could have removed the judgment lien during the bankruptcy case, you can still file a motion. A bankruptcy lawyer can help.

How Do Liens Work?

The lien remains on the property as a warning of the creditor's interest until debt payment is made. The creditor will remove the property lien after receiving payment of any outstanding balance owed either directly from the debtor or when the debtor sells the property. The creditor can also seize and auction the property to pay down the balance.

Liens work well to protect creditor interests because while transferring the title without paying a property lien is possible, most people are only willing to buy a property with a clear ownership title—not one in which a lender has the right to sell it from under them. A prospective buyer usually won't agree to purchase the property unless the lien is paid from the sales proceeds.

Example. Soon after John bought his truck, he decided he should have purchased an electric "virtual" truck instead of the traditional gas-powered version. He promptly listed his old truck for sale for $10,000 less than he owed and secured an eager buyer quickly. However, the deal unwound when the buyer discovered the lender's lien and that $50,000 wasn't enough to pay it off and give him a clear title.

Example. John still wanted the electric "virtual" truck, so he traded in his gas-powered version instead of selling it to a private party. Even though John's old truck was worth only $50,000, the dealer paid off the $60,000 loan, which released the lender's lien so the dealer could take ownership and resell it with a clear title. The lender financed the remaining $10,000 in the new deal, and John drove off the lot in his new, rather costly virtual truck.

What Happens to Debts and Liens in Bankruptcy?

When a debt qualifies for a discharge—for instance, credit card balances, medical bills, leases, utilities, auto loans, and the like—the bankruptcy filing automatically erases the contract between you and the lender that holds you responsible for paying the debt. However, the lender retains the lien against the property.

As a result of the bankruptcy, the lender can't force you to pay. However, the lender can use the lien rights to recover the property, sell it, and apply the proceeds to the balance. Or, the lender can wait until someone else sells the property and use its lien rights to get paid before the property owner or other creditors receive payment.

For example, filing for Chapter 7 would erase the contract in which you agreed to pay a car loan. It wouldn't eliminate the lien on the car. If you didn't pay as agreed, the lender could still use the lien rights to repossess it, sell it at auction, and apply the proceeds toward the loss.

Why Don't All Liens Disappear in Bankruptcy?

Lien rights protect creditors from hefty losses associated with making large loans, and taking away a creditor's lien rights in bankruptcy would result in unfair outcomes. The bankruptcy filer would wipe out debt and keep valuable property without paying for it. By contrast, the lender would be out the entire loan amount and lose the ability to offset the loss by selling the property.

How to Categorize Debts With and Without Liens in Bankruptcy

When you file for bankruptcy, you'll categorize your debts into "secured" and "unsecured" debts. Understanding the differences will help clarify when you can keep property purchased on credit, identify the property you might lose because of a lien, and know when you can remove a lien during—or after—bankruptcy.

Unsecured Debt – No Lien Involved

A debt is an "unsecured debt" when the creditor has no lien or security interest against your assets. Without a lien, the creditor can't forcibly sell property you purchased on credit or seize any other property you own.

Example. Henry purchased school clothing and supplies for his four children on his department credit card. The debt is unsecured because general department store credit cards don't require liens. If Henry finds he can't pay, the store can't recover the kids' clothing, binders, pencil boxes, and other school supplies.

Example. Laura incurred $35,000 for an ambulance ride and emergency room care after having an allergic response at a local restaurant. The debt is unsecured because emergency providers don't ask for voluntary property liens or have a statutory right to place involuntary property liens if the debt goes unpaid.

Secured Debt – Lien Involved

A debt is a "secured debt" when the creditor has a lien against your property. The lien guarantees the lender the right to reclaim property if you don't pay.

Mortgages, car loans, and equipment purchases almost always require voluntary property liens to secure the debt with the property purchased. Additionally, if you buy a mattress, computer equipment, large appliance, furniture, or jewelry on credit, you'll likely give the lender a voluntary lien on the items purchased. Check the contract or receipt for the credit terms.

Giving a lender a voluntary lien against valuable property other than what you purchase with the loan is also possible, and the debt will also be a secured debt. Involuntary secured debts are created when a taxing authority or someone who provides services has a right by law to place a lien on your property if you don't pay.

Example. When Jocelyn opened her smoothie stand, she purchased frozen drink machines on credit. Because the machines were pricey, the lender required a lien, which created a secured debt and allowed the lender to seize the machines if Jocelyn didn't pay as agreed.

How Creditors Turn Unsecured Debts Into Secured Debts

Creditors with secured debts have more ways to collect than do those without. Turing an unsecured debt into a secured debt is accomplished by suing and winning a money judgment in court. Once received, a judgment creditor can use the judgment to put a lien on your property. A judgment creditor can also garnish wages, levy funds in bank accounts, and seize other property types.

Understanding how judgment liens work is important because they are among the few liens you can sometimes—but not always—eliminate in bankruptcy.

Example. Adolfo borrowed $25,000 from a family friend, Sharon, but couldn't repay the debt. It was unsecured because Sharon hadn't asked for collateral. After Adolfo repeatedly avoided Sharon, she sued him in state court and won a money judgment. Sharon filed the money judgment with the county recorder where Adolfo owned a home, effectively placing a lien on it. Sharon turned the unsecured debt into a secured debt and will likely receive payment with interest when Adolfo sells the home.

What Happens to Unsecured Debts in Bankruptcy?

When you file for bankruptcy, you can wipe out qualifying unsecured debts, such as most credit card obligations, personal and "payday" loans, and back rent and utility payments. Not all unsecured debts are dischargeable in bankruptcy. For instance, unsecured domestic support obligations and student loans are "nondischargeable" and don't qualify for discharge.

Example. Patricia used a particular credit card to purchase crafting supplies and maxed it out long before she filed for bankruptcy. She eliminated the $2,500 unsecured credit card balance in Chapter 7. Because the credit card holder didn't have a lien, the creditor wasn't entitled to seize the craft supplies or any other property. Patricia can keep the supplies if a bankruptcy exemption covers them. If not, the Chapter 7 trustee can sell them and distribute the funds to creditors.

What Happens to Secured Debts in Bankruptcy?

Filers must make arrangements to pay for the secured property in bankruptcy. Otherwise, the lender will use the lien rights to recover the property by asking the bankruptcy court for permission to proceed with foreclosure or repossession or wait until the bankruptcy case ends to proceed.

How Do I Keep Secured Property in Bankruptcy?

Although bankruptcy breaks debt contracts, you can arrange with the lender to put a secured debt contract back in place. In Chapter 7, the formal process is known as "reaffirmation." It involves the bankruptcy court, although some lenders and borrowers reach informal agreements. In Chapter 13, the Chapter 13 plan becomes the new agreement.

However, you must meet other requirements. For instance, you must be able to protect the property equity with a bankruptcy exemption. If you can't, you'll lose it to the Chapter 7 trustee—not the lender with a lien—or have to pay to keep the property in Chapter 13.

You'll also need to be current on the payment if you file for Chapter 7. If you aren't, you'll lose it to the lender. Learn about the requirements to keep a house in Chapter 7 bankruptcy. It's also important to know how to keep vehicles in bankruptcy.

However, you can catch up on a financed payment over time if you file for Chapter 13. But it can be expensive if you have significant home equity. Learn more about filing for Chapter 13 when you have a lot of home equity. If you have multiple financed vehicles, find out what you must do to keep two cars in Chapter 13.

Consult a Bankruptcy Lawyer

Each bankruptcy case is unique and you might have a lien-related issue not covered in this article. Consider meeting with a local bankruptcy attorney to thoroughly review your financial situation. The lawyer might provide a discounted rate for the initial meeting or apply the consultation fee to the costs of services. Many bankruptcy attorneys also offer free initial consultations.