Bankruptcy can, in the right circumstances, remove a judgment lien from the title to your home. Here are the conditions for pulling this off.
The Problem, and the Bankruptcy Solution
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. The debt is encumbering the title to your home, eating up your equity.
A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home.
Those lien rights, those property rights, are similar to the lien rights of a vehicle loan lender. The lender is a lienholder on the car’s title. If the vehicle owner doesn’t pay the vehicle loan, the lender can repossess the vehicle. Similarly, a judgment lien holder on your home can, under many 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. See, generally, Sections 727 and 1328 of the U.S. Bankruptcy Code. The problem is that in many situations bankruptcy does not curtail creditors’ lien rights. In the example of a vehicle loan with the lender on the vehicle’s title, if you discharge that debt the lien still survives. You generally have to either surrender the vehicle or, if you want keep the vehicle, pay the debt.
However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien. This would take away the creditor’s dangerous rights against your home. 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 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.” Bankruptcy Code Section 101(36). Mostly, this refers to judgment liens.
- The judgment lien at issue must attach to your “homestead.” That is, it attaches to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.” Bankruptcy Code Section 522(d)(1).
- The judgment lien can’t be for child or spousal support or for a mortgage. Subsections 522(f)(1)(A) and (2)(C).
- The judgment lien “impairs” the homestead exemption. That is, “you may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs a [homestead] exemption.” Section 522(f)(1)
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.
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.