Posted by Kevin on August 19, 2019 under Bankruptcy Blog | 
Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home.
A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home. A judgment lien holder on your home can, under some circumstances, foreclose on your home. At the least, it can force you to pay the debt when you sell or refinance your home.
Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt. The problem is that in many situations bankruptcy does not curtail creditors’ lien rights which pass through the bankruptcy. Even though you discharge that debt, the lien still survives. It can and does come back to haunt you even after a successful bankruptcy.
However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien. This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.”
The Conditions for Judgment Lien Avoidance
Here’s how the process works.
When you file bankruptcy, to “avoid” a judgment lien you must file what is called a motion with the Court and meet certain conditions:
- The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Mostly, this refers to judgment liens.
- The judgment lien can attach to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.”
- The judgment lien can’t be for child or spousal support or for a mortgage.
- The judgment lien “impairs” the homestead exemption. In earlier versions of the Bankruptcy Code, the concept of impairment was, at times, confusing. However, under the current Code, it is pretty much a straightforward analysis.
Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.
For Example
Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:
- It’s a judicial lien—one “obtained by judgment.”
- The lien attaches to your homestead—the place you “use as a residence.”
- The lien was not for child or spousal support or related to a mortgage.
- All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.
In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.
Posted by Kevin on August 6, 2019 under Bankruptcy Blog |
Lawsuits against You that Bankruptcy Ends
Many legal claims against you or your closed or closing business are resolved by the filing of your bankruptcy case. They are resolved either legally or practically, or both.
Claims that are legally resolved by your filing of bankruptcy are those intended to make you pay money. The discharge (the legal write-off) in bankruptcy of whatever debt you owe will usually result in you not needing to pay anything on the claim under Chapter 7 “straight bankruptcy.” There’s not much point to a lawsuit to determine whether you owe money or about how much you owe if any such debt will just get discharged in bankruptcy.
Lawsuits that Bankruptcy Does NOT End
However, there are certain types of debts that would still need to be resolved by a court. In these situations the creditor would likely get permission from the bankruptcy judge to start a lawsuit or to continue one already started. Here are three types that need court resolution.
1) Determining the Amount of a Debt
If a debt is being discharged in a no-asset Chapter 7 case—one in which all assets of the debtor are “exempt” and protected—then, as indicated above, the amount of that debt makes no practical difference. Whatever the amount of the debt, it is getting discharged without payment of anything towards that debt.
But in an asset Chapter 7 case, in which the bankruptcy trustee is anticipating a pro rata distribution of the proceeds of the sale of assets, the amounts legally owed on all the debts need to be known for that distribution to be fair to all the creditors. That’s because the established amount of any single debt affects the amounts received by all the creditors. So litigation to determine the validity or amount of a debt needs to be completed, even if by a relatively quick settlement.
2) Possible Insurance Coverage of the Debt
If a claim against a debtor may be covered by insurance, then the affected parties likely want the dispute to be resolved legally.
That’s because a court needs to determine 1) whether the debtor is liable for damages, 2) whether those damages are covered by the insurance, and 3) whether the policy dollar limits are enough to cover all the damages or instead leave the debtor personally liable for a portion. The following types of business litigation tend to involve insurance coverage issues:
- vehicle accidents involving the business’ employees or owners, especially those with the complication of multiple drivers (and thus, multiple possible insurance coverages)
- claims on business equipment damaged by fire or flood, or stolen
In these situations the bankruptcy court will likely give permission for the litigation to continue outside of bankruptcy court, while not allowing the creditor to pursue the debtor as to any amount not covered by the insurance policy limits.
3) Nondischargeable Debts
Some of the biggest fights about business-related debts occur when a creditor argues that its debt should not be discharged in the bankruptcy case. The grounds for objecting to discharge are quite narrow—in general the debtor must have defrauded the creditor, embezzled or stolen from the creditor, or intentionally and maliciously hurt the creditor or its property.
Also, and much more prevalent in the last few years, are student loan debts. Since the average student loan debt for an undergraduate is zeroing in on $40,000, litigation over whether the student loan debt is dischargeable, is become much more commonplace.
Posted by Kevin on August 4, 2019 under Bankruptcy Blog |
Debtors’ prisons? There’s that and a lot more to the very colorful history of bankruptcy law.
American bankruptcy law naturally grew out of the law of England during our colonial history. Pre-Revolutionary War bankruptcy laws were extremely different from current law.
- The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry VIII. Debtors were called “offenders” under this first law, in effect seen as perpetrators of a property crime against their creditors. The purpose of this law, and as expanded during the following hundred and fifty years, was not to give relief to debtors. Rather it was to provide to creditors a more effective way to collect against their debtors.
- Given this purpose, it is not surprising that this first law did not give debtors a discharge—a legal write-off—of their debts. In a bankruptcy the assets of the “offender” were seized, sold, and the proceeds distributed to creditors. And then the creditors could still continue pursuing the “offender” for any remaining balance owed.
- A bankruptcy proceeding could only be started by creditors, not by debtors. Creditors accused a debtor of an “act of bankruptcy,” such as physically hiding from creditors, or hiding assets by transferring them to someone else. The current extremely seldom used “involuntary bankruptcy” is a remnant of this.
- Strangely, only merchants could file bankruptcy. Why? Credit was seen as immoral, with only merchants being allowed to use credit, for whom it was seen as a necessary evil. As the only ones who had access to credit, only merchants had the capacity to become bankrupt.
- For the following century and a half through the late 1600s, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” to seize their assets, put them into pillories (structures with holes for head and hands used for public shaming), and even cut off their ears.
- Finally in the early 1700s the discharge of debts was permitted for cooperative debtors, but only if the creditors consented!
- Yet the law still provided for the death penalty for fraudulent debtors (although it was very seldom used).
- Cooperative debtors received an allowance from their own assets, the very early beginnings of the current Chapter 13 “adjustment of debts.”
So this was the English bankruptcy law that was largely in effect at the time that the U.S. Constitution was adopted. That gives some perspective on what the framers may have had in mind with the Bankruptcy Clause of the U. S. Constitution. That Clause gave Congress power to “pass uniform laws on the subject of bankruptcies.” Fortunately the language is so open-ended that it gave bankruptcy laws the opportunity to evolve during the last two hundred fifty years into one infinitely both more compassionate and beneficial for the economy.
But this evolution during our national history was extremely rocky, until surprisingly recently. That is the topic of the next blog.
