Your ability to discharge your debts through bankruptcy depends on the types of debt you carry. Even though bankruptcy knocks out your personal liabilities to repay a secured debt, the lien that the creditor places on your property survives your Chapter 7 bankruptcy case, unless it’s returned to the creditor. Bankruptcy only provides relief from debts that you\’ve racked up and so, if you carry liens into bankruptcy, they’ll be treated in a different manner. Although there are ways to get rid of liens, it depends on your financial situation and the level of equity that you\’ve accumulated in your home.
Lien – What is it?
When a creditor or a lender has security interest in your property, a lien is created. Liens are a part and parcel of secured loans. Secured loans like mortgage loans and auto loans are linked to a specific property, called the collateral and it is this collateral that guarantees the payment of the debt. When your payments are due, if you don’t make timely payments, the creditor has the right to repossess the collateral. The legal claim that the creditor has on the property is called a lien. Liens are created when you agree to let the collateral be seized by the lender in the event of non-payment of debt, like in case of a mortgage. On the other hand, liens can also be created without your knowledge and consent when the IReS records a lien against your real estate property due to non-payment of tax debt.
What types of liens exist?
One should know what type of lien a creditor holds as this is important for you to deal with the lien in bankruptcy. If you owe a non-consensual lien where the lien is placed on your property without your knowledge, it can soon get confusing.
Voluntary Liens: In case of secured loans like mortgage loans or car loans, a voluntary lien is created when you agree to give the lender an interest in your property to serve as security for a loan. Since you’re providing the creditors with the extra assurance that you’ll repay the loan, the voluntary liens induce the creditors to lend money. For example, when you buy a car and take out a car loan, you give a voluntary lien on the property.
Non-consensual Liens: This is similar to voluntary liens in its definition but the only difference lies in the fact that a non-consensual lien was obtained by the creditor without entering into an agreement. Such liens usually come into play after you’ve failed to pay an obligation that wasn’t generally thought of as secured. Non-consensual liens fall into two categories, those that are created by a law (statutory liens) and those that that result from a particular court action (judicial liens). No matter what is the basis of the liens but they do have the ability to cloud the title to your home, obstruct the sale of your property, squeeze your paycheck and may even result in the property being sold off to satisfy the creditor.
Dealing with liens in bankruptcy – Know your options
If there are liens in your property and you file for bankruptcy, you might be able to eliminate them through bankruptcy. However, in order to do so, you need to file motions with the bankruptcy court to obtain the relief that you sought for. The options that you may qualify for depend on the type of bankruptcy that you file, the exemptions that you’ve claimed for and the types of liens that you’re dealing with.
Reducing and eliminating liens – What are your options in bankruptcy?
While everyone wish to discharge their debts through bankruptcy, they desperately look for ways in which they can eliminate their liens. Basically there are 4 ways of reducing and eliminating liens in personal consumer bankruptcies. In most cases, the portion of the lien that is removed from your property is then considered as unsecured debt and it also means that it’s discharged off with the other unsecured debt. Check out some lien elimination options.
Lien Stripping: If you have multiple liens on the property and the current value of the property isn’t enough to cover all the liens, you can leverage this option called lien stripping to let go of the lien that is totally unsecured. This is usually used to eliminate junior (second or third mortgages) liens on your residential property, most often in Chapter 13 where the value of the senior liens exceed the value of the property. In a few districts, this is also allowed in Chapter 7 and you should check with an experienced attorney to know whether or not lien stripping is applicable in Chapter 7 in your district.
Lien Avoidance: Bankruptcy also allows you to remove certain kinds of liens from property that you claim as exempt. You’re not supposed to avoid liens that secure debts for the funds that you used to buy that property or other statutory liens like mechanics liens. It is possible to remove judgment liens for lien avoidance and this facility is both available in Chapter 13 and Chapter 7 bankruptcy.
Redemption: If you own personal property which is subject to purchase money lien for an amount that is greater than the property value, redemption is a good option for you. Redeeming your property means freeing it from the liens by paying off the secured creditor the present value of the property in full satisfaction of the lien.Redemptions are usually available in Chapter 7 bankruptcy and they can’t be used on real property or to eliminate liens securing business loans.
Cram down: This can be described as Chapter 13 version of the above option, redemption but this is certainly more versatile. Like redemption, you can easily satisfy liens by paying off the present value of the property. However, very unlike redemption, you can use cram down on real estate properties but not your home and you can even make payments in small monthly installments. In most cases, the amount is paid back to the creditor over the life of Chapter 13 plan.
Hence, when you have multiple liens on your property and you’re about to file bankruptcy to discharge off your debts, take into account the above mentioned ways of eliminating liens in bankruptcy so that a wrong step doesn’t mar you from filing bankruptcy in the correct legal way.