Avoiding Judicial Liens in a Chapter 13 Bankruptcy Case

Posted by Wesley Scott on April 9, 2022 at 7:30 AM
Wesley Scott

 shutterstock_448884079In a chapter 13 bankruptcy case, the debtor must pay all of their disposable income towards their debts in a three to five year repayment plan before their remaining debts are discharged. Disposable income is the income remaining after paying the debtor’s normal monthly expenses. This differs from a chapter 7 bankruptcy case, in which the debtor is not required to make payments towards their debts before receiving a discharge a few months after their case is filed.

Debtors typically are in chapter 13 because they earn too much income to qualify for a chapter 7 case, they have a lot of extra property that would be taken to pay creditors in a chapter 7 (the debtor keeps all their property in a chapter 13), or to mitigate the negative consequences of certain improper financial transactions that occur prior to filing for bankruptcy (elaborated upon in other blogs).

Due to the fact that chapter 13 repayment plans last for a while, it is common that the debtor will want to sell their home or secure refinancing of a mortgage during the course of their case. However, in order to be able to do so, the debtor will often be required to eliminate any liens against their property that create an encumbrance hindering their ability to procure clear title to the property. One such type of lien is a judgment lien, which is a lien against the property that is created when a creditor sues the debtor and receives a court judgment against them. The creditor can then ask the court to take the judgment and create a lien against the debtor’s property or, if the judgment is entered in the county in which the debtor’s real property sits, the judgment will automatically become a lien against the debtor’s property.

If the lien against the debtor’s property is a judicial lien, the debtor may be able to “avoid,” or remove, the lien from the property. In order to remove the lien from the property, the debtor must file a motion in their chapter 13 case asking the court to remove the lien. The court will grant the motion and remove the lien if the debtor is able to show that the judicial lien impairs the debtor’s right to claim the property as “exempt,” meaning legally protected under the law from being taken to pay creditors.

Without going into too much detail, debtors who file in bankruptcy in Minnesota are almost always able to claim their home as exempt, as State law exempts, and protects, the debtor’s primary residence, along with the land upon which it sits, to up to $450,000 in equity (the value of the property over any mortgages and any other debts secured by the property).  If the mortgage balance and the amount of the claimed exemption exceed the value of the property, any judicial liens against the property will be deemed to impair, and interfere with, the debtor’s right to exempt the property. The court will allow the debtor to avoid, and remove, any and all such judicial liens against the property.  For example, let’s say a debtor’s home is valued at $200,000 with a mortgage balance of $100,000. Under State law, the debtor’s equity will be exempt, and the combination of the mortgage balance and the claimed exemption will far exceed the value of the home ($100,000+$450,000=$550,000>$200,000). In such case, the court will grant the debtor’s motion to avoid, and remove, any all existing judgment liens, which will free the debtor to sell the home or gain refinancing with a clear title.

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This blog is designed to be a general overview of avoiding judicial liens in a chapter 13 bankruptcy case. As bankruptcy law can be complex, at times, it is advisable that a person considering filing for bankruptcy first consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!

 

 

Topics: Chapter 13, Chapter 13 Bankruptcy

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