The potential ability to get rid of judgment liens from your home’s title is an impressive benefit of bankruptcy.
Our last blog post was about preventing a creditor from getting a judgment against you, and from getting a judgment lien on your home. Today’s is about erasing a judgment lien from your home after it has already attached.
It’s important: because of how much damage a judgment lien can cause, you can greatly help yourself by filing a bankruptcy case either to stop a judgment lien from attaching to your home or to erase one that has attached earlier.
The Damage Caused by a Judgment Lien
A judgment lien can turn a debt you owe that is unsecured—does not legally attach to anything you own—into a secured debt—secured by what you own, such as your home. So the existence of a judgment lien can take a debt that you can discharge—fully and permanently write off in bankruptcy—into a debt that you must pay in full. And until it is paid, it can haunt you and your home for many years.
Judgment liens are dangerous for lots of reasons. They eat up equity in your home, potentially jeopardize your efforts to refinance or sell it, and seriously hurt your credit. The judgment creditor may even be able to foreclose on its judgment lien, resulting in a forced sale of your home to pay the judgment debt.
Clearly, if you have already been sued, have a judgment against you and a judgment lien on your home’s title, erasing that judgment lien would be a valuable benefit of bankruptcy.
Unusual to Erase a Lien in Bankruptcy
Most kinds of secured debts can’t be turned into unsecured debts in bankruptcy. Most liens cannot be erased. A vehicle lender’s lien on your vehicle’s title, or your home mortgage lender’s mortgage on your home’s title, remain on those titles after bankruptcy. If you want to keep your vehicle or your home, you generally have to agree to keep on paying their debts. The liens don’t go away until the debts are paid off, as long as you choose to keep the vehicle or the home.
This is true not just with voluntary liens such as these, but also many involuntary liens, such as income tax liens. Liens generally survive bankruptcy.
So be aware how unusual it is, even in bankruptcy, to be able to erase a judgment lien.
The Conditions for Erasing—or “Avoiding”—a Judgment Lien
It can only be done under certain circumstances. However, these circumstances apply to a large percentage of people filing bankruptcy who have a judgment lien on their home.
In order to get rid of—“avoid”—a judgment lien, that liens must “impair your homestead exemption.” (See Section 522(f) of the Bankruptcy Code).
Here’s what that means:
- The judgment lien that is being “avoided” must be attached to your “homestead.” That is defined differently in different states but generally refers to the place where you live.
- The equity in that homestead must be protected by a “homestead exemption.” State and federal laws provide different amounts of protection for your home, usually described as a certain maximum dollar amount of equity. These amounts vary quite drastically among the states—from about $5,000 of equity to an unlimited amount.
- The lien to be “avoided” can’t just be any kind of lien but must be a “judicial lien,” defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
- To be “avoided” the “judicial lien” can’t be based on child or spousal support, or be for a mortgage foreclosure.
- The judgment lien at issue must “impair the homestead exemption,” which generally means that the equity that the judgment lien attaches to is equity that is protected by the applicable homestead exemption. That generally means that without accounting for the judgment lien the amount of equity in the home does not exceed the homestead exemption.
For example, assume your home has equity (before accounting for the judgment lien) of $25,000. Also assume that your state’s homestead exemption is $30,000, so all of the $25,000 of equity would be protected by this homestead exemption. If you’d have a $10,000 judgment lien against your home, all of that $10,000 lien would be eating into that portion of the equity that is protected by the homestead exemption. Since the entire judgment lien “impairs the homestead exemption,” all of that lien can be “avoided”—erased through bankruptcy.