A judgment lien is created when a court issues a judgment against you, and the party that received the judgment records a lien against your property to pay for the judgment. If you file for bankruptcy under Chapter 7, you may be able to protect your home, your car, or other property from being taken to pay off this lien. This process is known as lien avoidance. You can avoid a lien if you could apply a bankruptcy exemption to some or all of the equity in the asset, and triggering the lien would prevent you from getting the benefit of the exemption to which you are entitled. (In other words, the lien would cause you to lose some of the equity that would otherwise be exempt.)
Lien avoidance can be total or partial. Total lien avoidance is especially helpful to a debtor because it results in wiping out the lien completely and giving the debtor ownership of the asset free and clear. Partial lien avoidance involves reducing the amount of the lien to the extent required by the exemption. You still will need to pay off the rest of the lien, probably as a lump sum, to avoid foreclosure or repossession. In general, a debtor should use lien avoidance whenever they can, even if they do not plan to keep the asset attached to the lien. This allows them to sell the asset and receive funds that they can use for something else.
Motions to Avoid a Lien
Your Statement of Intention in a Chapter 7 bankruptcy will tell your creditors what you plan to do with property that has been secured by a lien. On this form, you will need to check the column labeled “Property is claimed as exempt” next to the asset in question. You also will need to file a motion to avoid the lien. If you are not aware of this option when you file for bankruptcy, you likely can file a motion midway through the case to get rid of a lien. You might also be able to file a motion for lien avoidance if you become eligible for it partway through the bankruptcy proceeding. An asset might not have any exempt equity at the outset of the proceeding, but it might accumulate exempt equity over time.
Assets With No Equity
If there is no equity in your property, you technically would not be able to apply an exemption to it. This should mean that you would not be able to avoid a lien on that asset because the lien would not prevent you from using an exemption. However, there are some circumstances in which an attorney can help you argue that the lien should be avoided. You might even be able to avoid a lien if you have negative equity in a home, which means that the home is worth less than the amount owed on the mortgage. You can weigh the cost of retaining an attorney against the cost of the lien and your interest in keeping the property to determine whether this makes sense for you.