Avoid Judgments against Property in Bankruptcy (Equity not required!)

One really powerful goal that people (particularly homeowners) can try to accomplish in a bankruptcy case is “avoiding liens.”  When a lien is avoided, it basically means that it’s status as a secured obligation is undone, and the result is that the balance owed is a (usually) an unsecured claim, like most credit cards or personal loans.  This takes some timing, and may require some litigation, but the result can be well worth it.  This often arises when a debtor has multiple mortgages, or the debtor has judgments against them.  You can seek a court order “avoiding liens” or “avoiding judgments.”

In this case, out of the Bankruptcy Court for the Middle District of Pennsylvania, the debtor filed a chapter 13 case back in 2011.  He owned real estate, his primary residence, which he valued at about $310,000.00.  The debtor had two mortgages against this property, one with a balance of about $154,000.00, and a second mortgage with a balance of about $152,000.00.

As part of the creditors and debts listed, the debtor listed a judgment debt of about $118,000.00, which was recorded as a lien against the residence.  The debtor also claimed an exemption in the real estate (which, at the time, the most that exemption could be was $21,695), although he did not list an exemption value in his bankruptcy papers.

Subsequently, the debtor filed a motion to avoid this $188k judgment lien.  The Respondent creditor objected, arguing that the debtor cannot avoid a judgment lien when the debtor does not have any equity interest in the property.  (That is, if the value of the house was $310,000, and the two mortgages combined totaled $306,000, plus their lien, the debtor has no equity in the property.)

To be able to avoid a lien, a debtor must generally demonstrate that a lien is avoidable, and that the lien impairs an exemption that the debtor would otherwise be entitled to.  To figure out whether a lien impairs an exemption, you have to add up the value of the lien being avoided, all other liens on the property, as well as the debtor’s exemption in the property.  (In this case, the court had to calculate the sum of the lien being avoided ($118,000.00) plus all other liens on the property ($306,000.00),  plus debtor’s exemption ($21,695), totaling about $445,695.00)  From that sum, the court must subtract the value of the debtor’s interest in the property, as if there were no liens against the property ($310,000.00).  If the sum of all liens plus the exemption is greater than the value of the debtor’s interest in the property, the lien may be avoided (to the extent of that difference).  If the sum of all liens plus the exemption is less than the value of the debtor’s interest in the property, then the lien may not be avoided.  In this case, the sum of all liens and exemptions exceeded the value of the debtor’s interest in the property by about $135,000.00.  Thus, the Respondent-creditor’s lien may be avoided in its entirety, even though the debtor did not have any equity in the property.  In re Jeffrey Lawrence Cox, 11-BK-3909-MDF (Bankr. M. D. Pa, Jan. 6, 2017).

If you own property (again, usually real property) and have judgments recorded against you, bankruptcy may be a very effective tool in reducing the power of those judgments.  If the numbers are right, you could file a motion to avoid these kinds of liens.   A successful result often saves you thousands of dollars.

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