What Happens to Liens in Chapter 7 Bankruptcy?

Even if your debt is discharged in bankruptcy, the lien will still remain. Learn what happens to creditor liens on your property in bankruptcy.

By , Attorney

If you have a lien on your property, it won't go away automatically if you file for Chapter 7 bankruptcy. As long as the lien remains on the property, the lender can use the lien to recover the property if you don't pay as agreed.

But it's not impossible to get rid of a lien in Chapter 7. The bankruptcy court will remove a lien in a few particular cases. To understand what happens to liens in bankruptcy, it's a good idea to learn:

  • how liens work
  • the different types of property liens, and
  • the type of property lien you can eliminate in Chapter 7.

While you have some lien options in Chapter 7, you might find more relief by filing for Chapter 13 bankruptcy. A bankruptcy lawyer can review your case and explain options like "cramming down" or "stripping off" liens in Chapter 13.



How Liens Benefit Creditors and Create "Secured Debt"

Not all creditors have lien rights, and a creditor without lien rights can't take your property if you fall behind on your payment. For instance, most major credit card obligations aren't backed by liens and are "unsecured debts." The result? The lender can't seize the patio furniture you bought if you don't pay the bill.

But larger credit purchases for homes, vehicles, and expensive business equipment often involve liens and are "secured debts." A lien protects a lender against loss if a loan goes bad. Here's how it works.

The lender gets a property interest or "lien" on your property or "collateral." The lien stays on the collateral until you pay the debt. If you don't pay, the lender can seize the property, sell it, and use the proceeds to pay what you owe.

Learn about the differences between secured and unsecured debt.

Different Types of Liens in Chapter 7 Bankruptcy

Liens come into being in two ways: Sometimes, you agree to a lien, and in other instances, the creditor has a legal right to put a lien on your property without your agreement.

Voluntary lien rights. You agree to a "consensual" or "voluntary" lien when you borrow a significant amount of money. For instance, suppose you buy a home on credit. You'd sign a promissory note containing loan terms like the loan length and interest rate. In a separate document, you'd create a lien on the home by agreeing the house would serve as collateral. After the lender perfected the lien under state law, usually by recording the lien document, the lender would have the right to foreclose on the house if you didn't pay or breached another loan condition.

Statutory lien rights. A statute or law can give a lender a "nonconsensual" lien right you didn't agree to. For instance, under the law, the IRS can put a lien on your property if you don't pay federal taxes. Some student loan lenders have similar rights. Other involuntary liens include judgment liens and mechanics liens.

Here's where you can find out about other types of liens that can attach to your property.

Are Liens Automatically Discharged in Chapter 7 Bankruptcy?

No, a lien won't go away automatically when you file for Chapter 7 bankruptcy. The lien will remain even when a debt qualifies to be wiped out by the Chapter 7 debt "discharge," the order eliminating debt at the end of the case.

The result? Even though your responsibility to pay disappears, as long as the lien is in place, the creditor can recover the property.

How Liens Affect Debt and Property in Chapter 7 Bankruptcy

A lien doesn't affect your debt in Chapter 7; it affects the property securing the debt.

Major credit card lenders have unsecured debt because they don't place liens on the property you purchase. By contrast, home and car lenders put liens on the home or car you buy, giving them a secured debt.

That's why you can discharge credit card debt and keep the things you purchased, but you can't keep a house or car after Chapter 7 unless you continue to pay for it. Here's how it works.

All debt that qualifies for discharge, like a credit card balance, mortgage, or car loan, will be erased in Chapter 7. However, if a creditor secured the debt with a property lien, the creditor will remain entitled to the property. So even though unsecured and secured creditors alike can't force you to pay a debt after you've wiped it out in Chapter 7 bankruptcy, a secured creditor can seize property with a lien on it.

And that's exactly what the creditor will do if you don't agree to pay for it after Chapter 7 bankruptcy (more on this below in "How to Keep Property Secured By a Lien in Chapter 7 Bankruptcy").

Can a Creditor With a Lien Get My Property During Chapter 7?

Yes, it's possible. When you file for Chapter 7 bankruptcy, the automatic stay stops most creditors from pursuing collections against you. However, creditors with liens can object to the automatic stay.

If a creditor wants the property back while you're in bankruptcy, the creditor will file a motion asking the court to lift the automatic stay. If the bankruptcy court agrees, the creditor can recover the property.

The bankruptcy court will often lift the stay if the filer is behind on payments and the Chapter 7 bankruptcy trustee isn't going to sell the property for the benefit of other creditors.

Another option for a creditor with a lien is to wait until the case is over to foreclose, repossess, or seize the property.

How to Keep Property Secured By a Lien in Chapter 7 Bankruptcy

Bankruptcy filers who want to keep a house or car will continue paying the mortgage or car payment after bankruptcy, even without a contract (remember, the obligation to pay the debt gets wiped out in the Chapter 7 case). Many lenders will accept the payment and won't foreclose or repossess the property as long as the filer remains current.

The downside when the filer isn't protected by a contract is the lender can take the property anytime, as long as the filer's state doesn't provide other statutory legal protection. Also, payment history won't appear on a credit report. Filers who aren't comfortable with this situation can sign a new contract or reaffirmation agreement.

Learn how to file for bankruptcy and keep your car.

Can I Remove or "Avoid" a Lien in Chapter 7 Bankruptcy?

In some cases, you can remove a lien in Chapter 7 bankruptcy. But it works only in a few situations.

Will Chapter 7 Bankruptcy Remove a Lien on My House?

No, filing for Chapter 7 bankruptcy won't remove a lien from your house. Because the lien will remain on your home in Chapter 7 bankruptcy, you have two choices:

  • return the home to the lender, or
  • continue paying as agreed.

Specifically, if you have a mortgage on your home and want to keep it when filing for Chapter 7, you'll want to be current when you file and remain current after the case. It's the only way to be sure you keep your house because the lender doesn't have an obligation to modify your payments.

But that's not the only criteria to meet. If you have significant equity in your home, check whether you can protect all of it with a homestead exemption. If you can't, the Chapter 7 bankruptcy trustee will likely sell the house for your creditors.

Learn more about keeping your home in Chapter 7 bankruptcy and what happens to mortgages in bankruptcy. You'll learn that filing for Chapter 13 is a better bet if you're behind on payments and would like to keep your house or have too much home equity to file for Chapter 7.

What Does "Avoiding Liens in Chapter 7" Mean?

A lien often prevents a filer from keeping property they'd otherwise be able to protect with a bankruptcy exemption. The process of "avoiding" a lien fixes this problem.

A lien protects a lender in Chapter 7 bankruptcy by ensuring the lender gets paid. For instance, you can't protect any car or home equity unless your home value exceeds the amount you owe on your mortgage or car loan.

However, an exception exists. If the lien is a "judgment lien," you can ask the court to avoid it.

How to Avoid a Judgment Lien in Chapter 7 Bankruptcy

The bankruptcy court will avoid a judgment lien that "impairs" or interferes with your right to protect property with an exemption. But first, you need to know how to identify a judgment lien.

A creditor with unsecured debt, like a credit card lender, can turn it into secured debt by taking you to court and suing you for the amount owed. After winning, the creditor can use the money judgment to attach a judgment lien to your property and secure the debt.

Here's where the Chapter 7 exception comes into play. You can ask the bankruptcy court to "avoid" or remove a judgment lien so you can use the bankruptcy exemption without first paying the judgment amount. Although you'd be limited to protecting the property up to the bankruptcy exemption amount and the creditor would be entitled to the remainder, it would be better than losing the property altogether.

Example. A creditor received a money judgment for $100,000 and filed a lien against property used in your business in the appropriate state agency. Your state exemption laws allow you to exempt $10,000 of property used in your trade. A motion asking the bankruptcy court to avoid the lien on a tractor valued at $10,000 that you use to farm microgreens would likely be successful. Still, you'd lose any remaining business property.

Learn more about getting rid of judgment liens in bankruptcy.

Forgetting to Avoid a Lien in Chapter 7 Bankruptcy

Because lien avoidance doesn't occur automatically, you must file a motion with the court and demonstrate that the judgment lien impairs your right to property you could protect with a bankruptcy exemption. If you don't ask the court to avoid the lien, you'll remain at risk of losing the property if the creditor takes steps to recover it after Chapter 7.

Discovering a property lien after your Chapter 7 bankruptcy ends is not unusual. If you find yourself in this position, and it's a lien you could have eliminated, you or your bankruptcy lawyer can ask the bankruptcy court to reopen the case to file a lien avoidance motion. Most courts allow these requests.

How to Eliminate a Lien By "Redeeming" Property in Chapter 7 Bankruptcy

If a creditor has a lien on personal property and you owe more than the property is worth, you can "redeem" the loan by paying the property's value. The creditor will release the lien after you pay the reduced loan amount.

You'll need to file a motion asking the court for permission to redeem the loan, and not all property will qualify. Here are the requirements.

  • Personal property you can touch. You can't redeem real estate or intangible property, so you won't be able to redeem homes, rental property, investments, or intellectual property rights.
  • You must use the property for personal or household purposes. You can't redeem business property used by your company.
  • You can protect all equity with a bankruptcy exemption. If the Chapter 7 trustee intends to sell the property, you won't be able to redeem it.

The Chapter 7 Trustee Might Challenge a Lien's Validity

Creditors must "perfect" some liens before they're valid by recording them in either the county where the real estate is located or, if it's personal property, by filing the lien with the appropriate state agency.

A creditor who doesn't follow the proper procedures won't have a valid lien, and a bankruptcy trustee who sells the property can disregard the lien and not pay off the property loan before using the sales proceeds to pay other creditors.

This situation doesn't often happen when a professional lender is involved. However, friends and family lenders frequently fail to prepare lending paperwork properly.

Liens and Debts That Don't Go Away in Bankruptcy

If you can't get rid of a lien in Chapter 7 bankruptcy, you'll pay what you owe after your Chapter 7 case or lose the attached property. You'll also remain responsible for "nondischargeable" debts after bankruptcy, even if the creditor doesn't have a lien against your property.

Common nondischargeable debts include domestic support obligations, student loans, and recently incurred tax debt. Your payment obligation will also remain on debts the bankruptcy court declares nondischargeable, such as debts related to fraud and willfully harming someone's property or person.

If You Need Time to Pay a Lien or Debt

Many people don't have the entire balance they'd need to pay off a lien or debt that survives Chapter 7. If you'd like to avoid wage garnishment, bank levy, and property seizures, consider talking to your bankruptcy lawyer about filing for Chapter 13 soon after Chapter 7.

This "Chapter 20" strategy forces a creditor to accept a Chapter 13 repayment plan and gives you up to five years to pay off your obligations. Even though you wouldn't qualify for a Chapter 13 discharge for another four years, you wouldn't need one because you would have already discharged qualifying debts in Chapter 7.

Of course, you'd have to pay your lawyer's attorneys' fees to set it up and pay the Chapter 13 trustee up to 10% of the amount paid to creditors. But you might find the peace of mind worth the cost.

Contact a Bankruptcy Lawyer

Liens in bankruptcy can be one of the more complicated areas of bankruptcy law. If you're concerned about a lien on your property, consider contacting a bankruptcy attorney for advice.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

Schedule D: Creditors Who Have Claims Secured By Property

Statement of Intention for Individuals Filing Under Chapter 7

Chapter 7 and 13 Bankruptcy Form List

Bankruptcy Document Checklist

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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