Can a Chapter 7 Be Filed if a Debt Has Placed a Lien Against You?

by Patricia Dzikowski

You can file for Chapter 7 bankruptcy after a creditor has placed a lien against your property, but bankruptcy can provide relief from liens only if you take additional action after you file. Otherwise, liens often are not affected by the bankruptcy. Even when you are willing to take additional action to deal with liens in your bankruptcy, not all liens can be removed or reduced. It depends on the type of lien it is and the property it is attached to.

Secured Debt

If a creditor places a lien against your property, it means the creditor holds an interest in your property to secure repayment of a debt you owe to that creditor. If the property is sold in your Chapter 7 bankruptcy, the lien creditor must be paid in full from the proceeds before any money can be paid to any creditors who don’t hold liens. The difference between the lien amount and the property value is called equity. If there is equity in the property, the Chapter 7 trustee will be interested in selling the property. If there is no equity, the trustee might abandon the property. This would give the lien creditor the right to pursue collection from the property outside of bankruptcy.

Lien Types

When you buy a home or a car on credit, you voluntarily give the lender a lien or mortgage on the property you are purchasing. But there are ways creditors can get a lien on your property without your consent. Judicial liens are created when someone obtains a judgment or court order against you and takes steps that cause the judgment or order to attach (or connect) to your property as a lien. Statutory liens result from laws that give certain creditors lien rights if you don't pay a debt. Common examples include tax liens for unpaid taxes and mechanic's liens for unpaid invoices for work done on your property.

Judgment Liens

If a judgment lien attaches to property you are claiming as exempt (or excluded) from the bankruptcy and the effect of the lien is to lessen the value of your exemption, you can ask the court to avoid, or remove, the lien by filing a motion explaining how the lien impairs (or restricts) your exemptions. This applies to judgment liens and not to statutory liens and most voluntary liens, such as mortgages or purchase money liens on cars. Federal and state exemption laws determine what property you can claim as exempt, or protect, in your bankruptcy. You can check the laws in your state to determine the exemptions that apply in your area.

Satisfying Liens

A car or other item of personal property that is liened and claimed as exempt or abandoned by the trustee can be redeemed or reaffirmed. To reaffirm, you sign an agreement to reinstate your personal obligation for the debt and continue to make payments. To redeem, you pay the value of the property in full satisfaction of the lien. For real property, in most districts, you have only two options if the mortgage holder is not willing to work with you. You can continue to make payments, often without reaffirming the debt, or surrender (give up) the property. You must file a motion with the court to accomplish reaffirmation or redemption.