Bankruptcy Can Remove a Judgment Lien

Posted by Kevin on August 19, 2019 under Bankruptcy Blog | Comments are off for this article

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.