Motion to Avoid a Lien in Bankruptcy

By Beverly Bird

A successful bankruptcy can be like a magic wand, eliminating your responsibility for paying debts. The wand can only affect debts, however, not liens created by them – they're two separate things. If you owe someone money and he goes to court and gets a judgment against you, and if he then uses the judgment to create a lien against your property, your bankruptcy discharge removes only your liability for the underlying debt. Removing the lien – called "avoiding" it in bankruptcy terms – involves taking an extra step.

Motion to Avoid Lien

Although removing or avoiding a lien doesn't happen automatically as part of your Chapter 7 proceedings, it's relatively easy to accomplish if you have not received a discharge yet. You can file a request with the bankruptcy court called a motion to avoid lien. You must serve a copy of the motion on all interested parties. These include the trustee and the creditor who perfected or created the lien by filing a copy of its judgment with the proper government office. The creditor can object by filing a response to your motion, but it probably won't do so if the associated debt is clearly dischargeable.

Conditions of Avoidance

When you filed your bankruptcy petition, you should have submitted a statement of intention as part of the documentation. This form tells the court what you intend to do with any property that's secured by loans or has other liens against it. The statement includes a box you can check off for each piece of property, indicating that you've claimed it as exempt from the bankruptcy proceedings. This protects its equity so the trustee cannot liquidate the property to pay your creditors. Hopefully, you checked this box off. Otherwise, you must amend your bankruptcy petition to do so before you can proceed with avoiding the lien. This may require an extra motion, seeking permission from the court to do so. Successfully avoiding the lien requires that there is no equity in your property after accounting for the mortgage lien and your homestead exemption. There's no value available to the creditor to satisfy the underlying debt.

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Chapter 13 Bankruptcies

If you filed for Chapter 13 rather than Chapter 7, avoiding a lien also requires a motion. The process is similar; you must establish to the court's satisfaction that the value of the property is not sufficient to cover all encumbrances against it. This can include consensual liens, such as those created by a second mortgage or home equity loan. If your property is underwater – its fair market value is less than the first mortgage against it – a successful motion "strips off" junior lienholders. Their associated liens are removed and these become unsecured debts.

After Discharge

If you've already received your Chapter 7 discharge, it's not too late to avoid a lien. You must reopen your bankruptcy first, however. Doing so doesn't affect your discharge – you're still absolved from responsibility for paying your eliminated debts. You must first file a motion asking the court to reopen your proceedings, and then you file a second motion to avoid the lien. You must meet all the same conditions that would have applied had you filed the motion before your discharge.

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What Happens if the Trustee Abandoned an Asset?

References

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Schedule F Bankruptcy Discharge

Bankruptcy means a fresh start – a court order protects you from collections and lawsuits, and eventually, the court discharges (cancels) some of your debts. You must report your assets and liabilities, and you will be required to sell your non-exempt property to repay creditors (in Chapter 7) or set up a repayment schedule (in Chapter 13). As your bankruptcy case begins, you'll complete a Schedule F, and it's vital to know the difference between a secured and unsecured debt when preparing this form.

Define Bankruptcy Terminated

If you file for bankruptcy protection from creditors, a federal court gains jurisdiction over your assets, debts and financial affairs. The court has the authority to eliminate dischargeable debts, liquidate your assets or set up a repayment schedule (as in a Chapter 13 bankruptcy filing). However, the court also has the authority to dismiss or terminate the case, either on your motion or on its own initiative.

Can I Convert to a Chapter 7 Without Losing My House or Car?

When you file for Chapter 13 bankruptcy protection, the court requires you to make payments on a three to five-year repayment plan. But it's possible to convert your case to a Chapter 7 bankruptcy. Sometimes, conversion is necessary because you can’t keep up with the payments required under your Chapter 13 plan, but conversion may be possible regardless of your reason. Depending on your situation, you may keep your house and car under Chapter 7, though it may not be easy.

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