Avoiding a Lien

“Lien Avoidance”, or “Avoiding a Lien” is essentially wiping away that interest that a creditor has in your property, removing their right to repossess it, or otherwise “take it back”.

Avoiding Liens.

Generally secured creditors maintain their security interest after the bankruptcy is filed.  However, in some cases that security interest (i.e., lien) can be avoided by bringing a separate action during the bankruptcy to avoid the lien.  There are three types of liens that are commonly avoided:

1. Judgment lien.

• If you have real property (i.e., real estate) and a creditor gets a judgment against you prior to you filing bankruptcy that judgment can become a lien against your property.  In certain cases, after the bankruptcy is filed, this lien can be avoided.  It is your responsibility to discuss any liens against your property with us.  My office does not do searches for liens.  A local title company can do a search if you would like.  If you have a judgment lien that can be avoided in the bankruptcy a retainer is required to prepare the paperwork to avoid the lien.  If a judgment lien exists and it is not avoided in the bankruptcy when you go to sell or re-finance your property you would be responsible for either paying the debt or trying to re-open your bankruptcy to avoid it, which could become costly, or the judgment creditor could foreclose on the property.

2. Non-purchase money security interest.

• A non-purchase money security interest refers to a legal concept in the field of secured transactions. In simple terms, it is a type of security interest that is granted by a debtor to a creditor without the creditor providing any new value or extending credit for the specific collateral. Unlike a purchase money security interest (PMSI), which arises when a creditor finances the acquisition of collateral, a non-purchase money security interest is created in situations where the debtor already owns the collateral and the creditor is seeking security for a preexisting debt or obligation. This distinction is important as it can affect the priority of competing claims in case of default or bankruptcy.
• When you obtain a personal loan, the lender may ask for a security interest in household goods.  This type of security interest is called a non-purchase money security interest and is avoidable in some circumstances.  Most attorneys will charge a separate retainer for this extra service.  If a non-purchase money security interest exists and it is not avoided in the bankruptcy the creditor can take action during the bankruptcy or after the bankruptcy is over to repossess the property.  While this is rarely done due to the cost of such action and recovery, it is certainly a possibility, and you should discuss such with your attorney.

3. Subordinate mortgage.

• If there is no equity in your home for a deed of trust to attach to, the debt is technically unsecured, and the lien can be avoided in a Chapter 13 bankruptcy.   For example, if you have a home worth $300,000, with a first mortgage of $320,000 and a second mortgage of $50,000.00.  Then, the second is unsecured because there is no equity for the lien to attach to.  In a Chapter 13 bankruptcy, the second mortgage can be treated as an unsecured debt and the lien removed.  The amount may count towards the unsecured debt limits.

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