Bankruptcy doesn’t just give you a fresh start by writing off debts. It frees up your home by often getting rid of its judgment liens.
Writing off debts is good. But if a creditor got a judgment against you, and you own a home, most likely that debt has also turned into a judgment lien on the title of your home. You’re not going to get much of a fresh start on your home if it continues to be saddled by a judgment lien or two.
Bankruptcy is relatively good at writing off (“discharging”) debts. But getting rid of liens can be trickier. However, both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” do provide a way to get rid of, or “avoid,” judgment liens.
Today’s blog post is about judgment liens, why they are so dangerous, and how both “Chapters” of consumer bankruptcy can be very helpful in dealing with judgment liens. (Then the next blog post will be about whether a particular judgment lien can be “avoided,” and how that’s done.
The Dangerous Judgment Lien
If a creditor has gotten a judgment against you at any time before you file bankruptcy, and you are on the title of any real estate including your home, that judgment has likely turned into a lien on the title to that real estate.
A lien is a creditor’s “security interest” in something you own. A lien effectively gives the creditors rights over what you own in order to make you pay the debt you owe.
A judgment lien is a lien which usually attaches to your home (as well as often to other assets) when a judgment is entered against you in a lawsuit.
A judgment lien is dangerous because it gives the creditor a huge amount of leverage to make you to pay the entire debt. If you try to sell or refinance your home that debt has to be paid—usually in full—out of the sale or refinancing proceed you would have received and were likely counting on. The judgment lien may even altogether prevent you from completing the sale or the refinance. In many situations the judgment lien gives the creditor the ability to foreclose on your home, forcing you to pay off the debt in order to save the home.
You May Have a Judgment Lien without Knowing It
Sure, usually you know when you’ve been sued by a creditor. You’re handed papers that make that clear. But sometimes you don’t get personally served and don’t find out about the lawsuit. Maybe you get something in the mail and because you think it’s just another collection notice you don’t even open it. Or you looked at it but didn’t read it closely. Or you tried to but you just didn’t understand the consequences of not responding in time.
So you don’t respond within the time provided, you lose the lawsuit by default, and a judgment is entered against you for the amount that the creditor asked for. A judgment lien then attaches to your home. (The details of the procedure differ state to state.) Even if you are fully paying attention, you may not be informed that the judgment has been entered. Or you may not be told when that judgment turns into a lien on your home.
You may think you have not judgment or no lien because you worked out a settlement with a creditor. For example, you may have responded to a creditor’s collection efforts by agreeing to make monthly payments. Even if you weren’t sued beforehand, the creditor may have required you to have a judgment taken against you if did not make the payments as agreed. As a result you could have a judgment lien on your home without realizing that you do.
The Benefits of Bankruptcy
Filing bankruptcy—either a Chapter 7 or 13—give you three big advantages when it comes to judgment liens:
1. Bankruptcy will stop the creditor from getting a judgment lien if it hasn’t already gotten one. Even if a lawsuit has already been filed, as long as the bankruptcy is filed before the judgment is entered it never will be and no judgment lien will attach to your home.
2. If a judgment lien has already been entered, usually bankruptcy will stop the lien from being enforced. If the law allows a judgment lien to be foreclosed to force you to pay, the creditor won’t be able to start or finish such a foreclosure.
3. In addition to the underlying debt likely being discharged (written off forever) in bankruptcy, the judgment lien itself can often also be gotten rid of forever through the judgment lien “avoidance” procedure. Our next blog post is about how to qualify for this extremely helpful procedure, and how it works. See Section 522(f) of the Bankruptcy Code for an advance look at this.