A judgment lien occurs when a creditor sues you, gets a judgment against you, and files a lien document in county records (or another appropriate place for registering documents) against your personal or real property to satisfy the judgment. Under the right circumstances, you can eliminate judgment liens in a bankruptcy.
When you borrow money to purchase personal or real property, the lender often asks you to grant it a special right to take possession of the property and sell it if you fail to pay. This right is called a lien and we call the loan a secured loan. When you get a mortgage or finance a car, you grant a lien to the lender.
Even when you purchase a piece of jewelry or a refrigerator you're often granting a lien to the seller (be sure to read the back of the receipt). These are voluntary liens because you choose to borrow the money or purchase the item. Not all liens are voluntary, however, as explained just below.
Learn more about liens at Judgment Liens in Bankruptcy.
A judgment lien is not the same as a lien that you agree to when you purchase an item, as described above. Instead, it's a lien that attaches to your personal or real 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 of John's personal property, including his furniture, his appliances, and his collection of vintage baseball cards. In most jurisdictions, Bank would file the judgment lien in the same county records office where deeds and other important papers are filed and made available for the public to view. Bank can send a sheriff to John's house to take that property and sell it to satisfy the debt.
If you file for bankruptcy, you can get rid of judgment liens on your property through a process called lien avoidance. a judgment lien if you meet all of the following four conditions:
Example. Lisa borrowed money from Credit Union to buy her car, but she stopped repaying the loan. The Union has recorded 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.
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. Andy borrowed money from Bank A to buy his car. The car is worth $20,000, and he still owes $5,000 on the car loan. Andy has $15,000 in equity in his car. Bank B sues Andy on a different debt, gets a judgment of $10,000, and records its judgment lien, which attaches to the equity in Andy's car. Andy files Chapter 7 and agrees to repay his car loan and keep the car. Without the judgment lien, the equity is $15,000. Under the laws of Andy's state, he can exempt up to $7,000 of the value of a vehicle, leaving $8,000 nonexempt. The judgment lien will be reduced to $8,000, and Andy will have to pay that amount to Bank B (in addition to the $5,000 he owes Bank A.)
Your Statement of Intention in Chapter 7 is a form that you file in court, in which you list all secured debts, including judgment liens. 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. That form includes an option called "property claimed as exempt" which you must check if you want to avoid the lien.
You will then file a motion with the bankruptcy 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 enter an order either avoiding the lien or leaving the lien intact.
The process to avoid a judgment lien in Chapter 13 is similar to the process for Chapter 7. Debtors can file a motion asking the court to avoid the lien, but in some jurisdictions, resolving the lien avoidance is accomplished as a part of the confirmation of the repayment plan. Standard plans in those jurisdictions include a section for the debtors to list the liens they're asking the court to avoid.
Structuring a repayment plan to include treatment of the liens is a convenient way to bring the proposed avoidances before the court. No need to file separate motions or hold special hearings. But, it still gives creditors sufficient notice so they can file an objection if desired.
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. If you avoid a lien, then convert your case to a different chapter, the lien will remain avoided forever as long as you make it through the case and obtain a discharge. But if you dismiss your Chapter 7 or Chapter 13 case, the lien will be reinstated just as if you had never filed bankruptcy.
Because liens survive bankruptcy cases, it's important that they be discovered, brought to the attention of the court, and resolved during the bankruptcy case. You don't want to miss the opportunity to get rid of a lien. Researching county records will usually turn up any judgments or liens. But, it often happens that someone has overlooked or a clerk has misfiled the judgment lien, and it doesn't come to light until the debtor attempts to sell real property or the creditor tries to collect on the debt.
You must ask the court to reopen the case, which will cost almost $250, and be prepared to pay the fee that your attorney will charge you. If you're successful in getting the case reopened, you'll still usually wait at least three weeks before resolving an unopposed motion to avoid a lien. The longer it's been since the case was closed, the more likely it is that the bankruptcy judge may deny the motion. That is why it is vital to do a thorough search of records before the case is filed.
Not every judgment results in a judgment lien, and not every judgment lien can be eliminated (avoided!) in a bankruptcy case. If you're thinking about filing bankruptcy, it's a good idea to search your county records for any judgment that a creditor has taken against you. This is where an experienced bankruptcy attorney can be invaluable in helping you decide whether bankruptcy is a viable option for you.