What is a lien?
A lien is an interest against a property that sticks around until the underlying debt is satisfied. You can visualize a lien as thumbtacks placed by a third party, keeping the title affixed against a property. The third party can remove the lien, but you cannot.
Liens are a problem because it can affect your ability to do what you want to the property you own. For example, having a lien on a home likely makes it difficult or impossible to sale or refinance it. There are many different types of liens, such as:
- Voluntary liens (mortgages and car loans are legally considered as liens)
- Tax liens
- Judgment liens
How do liens attach to a property?
A common way that a lien attaches to a property, even if the underlying debt has nothing to do with the property itself, is through judgment with a court after a lawsuit.
An unsecured creditor (the party that issued the credit card) may start out not having an interest in any property — hence the name unsecured, but they can elevate their status to a “judgment creditor,” after filing and winning a lawsuit, which allows them to attach lien property, such as a house.
Liens attached by judgment creditors are invasive, and their reach is greater than what you would naturally expect. If you own a house with someone else, even if you’re not married to them, their spending habits can affect you by encumbering the property in the form of a lien if they are reckless with their debt, and get sued.
Removing liens in a chapter 7 bankruptcy
Liens attached by a judgment creditor can be removed, or “avoided” in a chapter 7 bankruptcy but this is not automatically done.
A special motion must be filed when the bankruptcy case is active and open to avoid the lien so that it can be removed. You can think of liens as ticks that have the ability to burrow deep into the skin, requiring special tools and care to remove.
Scary right? Liens on real property can survive bankruptcy if it’s not dealt with.
What if the bankruptcy case is already closed, and there is still a lien?
Consider the following scenaro: years ago, a married couple with 80K in credit card debt filed for bankruptcy using the services of a bankruptcy petition preparer that charges them $200. They have little equity in the house and are entitled to keep it using a homestead exemption. All of their debts are discharged five months later – they get to keep their house and equity, and the bankruptcy case is closed.
In 2019, when they attempt to refinance their home, the potential lender alerts them that they’re not approved because there is still a lien on the house — seven years after they’ve filed!
All is not lost, as they can still remove the lien with the help of the bankruptcy court they initial filed with years ago.
In order to remove the lien now, they will have to:
- Motion to reopen their 2012 bankruptcy case;
- Motion to avoid the lien.
The moral of the story is, if you have assets and more at stake, and you have debts that you cannot pay, you need to pay special attention when you go through the process of bankruptcy and take advantage of every legal tool available to you.
The content on this website cannot be considered as legal advice and it does not magically create an attorney-client relationship.