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Can I Discharge a Judgment Lien in Chapter 7 or Chapter 13 Bankruptcy?

One of the ways a judgment creditor in Michigan can execute a State court money judgment is to record what is called a “judgment lien” on real estate or other property owned by the debtor.

 

A judgment lien is an encumbrance on the property just like a mortgage or tax lien or personal money security interest (“PMSI”) that will prevent the home or property from being sold without satisfaction of the judgment lien amount.

 

MICHIGAN BANKRUPTCY: JUDGMENT LIEN DISCHARGE IN CHAPTER 7 OR CHAPTER 13 BANKRUPTCY

 

The proper term for “judgment lien discharge” in bankruptcy is “avoidance.” The question here is whether a debtor in bankruptcy may “avoid” or “get rid of” such a lien just by filing bankruptcy.  To learn more about what a bankruptcy discharge is, read my blog post entitled Bankruptcy Discharge: What Does it Mean and When It Occurs

 

The short answer is “Yes.” The further answer is that, no, it cannot be done merely by filing for bankruptcy. 

A judgment lien is an encumbrance on the property just like a mortgage or tax lien that will prevent the home or property from being sold without satisfaction of the judgment lien amount.

 

First, you must file for bankruptcy and then you must file a motion to avoid the lien.

 

As with any motion, the adversary party therefore has an opportunity to respond to and argue against your request that the Bankruptcy Court grant your relief.

 

However, this sort of motion can be filed in either a Chapter 7 or Chapter 13 bankruptcy. Most lien avoidance in bankruptcy, otherwise, may only be accomplished with a Chapter 13 bankruptcy.

 

A judgment lien avoidance is an exception to that rule.

 

The reason why also provides some explanation of the issues that must be resolved with the motion to avoid.

 

MOTIONS TO AVOID JUDGMENT LIENS IN CHAPTER 7 OR CHAPTER 13 BANKRUPTCY:

 

As has been explained elsewhere on this site, all property owned or owed or claimed owned by a debtor in bankruptcy must be listed in full and assigned a value in current fair market value terms.

 

It is the job of the bankruptcy attorney to work with his or her client to ensure that this is accomplished fully and accurately. (A debtor filing bankruptcy without the assistance of an attorney runs a very strong risk of doing this badly or dishonestly—and running the risk of losing the property entirely and/or receiving criminal penalties, including imprisonment, for hiding assets in the bankruptcy process.)

 

It is the further job of the experienced bankruptcy attorney to attempt to protect as much of that property as possible by applying, on paper, in the bankruptcy petition, certain statutory “exemptions.”

 

Exemptions essentially remove property of the debtor from the “bankruptcy estate” created at the moment of filing of the bankruptcy case, over which the Chapter 7 Trustee or Chapter 13 Trustee serve as Trustee. It is the Bankruptcy Trustee’s job to “administer the assets” of the bankruptcy estate.

 

In short, exemptions prevent you from losing property to the asset seizure and liquidation power of the Trustee in a Chapter 7, and they prevent you from paying more in a Chapter 13, where, even though assets are not liquidated, the non-exempt value must be paid through the Chapter 13 payment plan to the debtor’s unsecured creditors.

 

The reason that you are able to avoid a judicial lien is that, if you can apply an exemption to the property in question, a lien against it may “impair” that exemption. This would essentially provide the lien-holding creditor a windfall from the bankruptcy estate positioning it above other similar creditors. The lien-holding creditor’s claim may simply be based upon something so low-priority as an unpaid dental bill, which should not allow it any priority standing relative to other creditors, among whom may sit, say, the Internal Revenue Service or child support recipients.

 

This is something that the Bankruptcy Code does not allow.

 

It is, however, possible that a lien does NOT “impair” an exemption, and this would provide a defense for the creditor to a motion to avoid.

 

A lien does not impair an exemption when the sum value of the lien, all other liens on the property, and the amount of the exemption that the debtor could claim if there were NO lien on the property exceeds the value of the interest that the debtor would have in the property in absence of any liens.

 

In addition, the lien must be a “judicial” lien, which means a lien obtained by way of a Michigan court judgment, levy, sequestration, or other such legal process.

 

Likewise, the lien must attach to an actual interest in property.

 

For example, one case arising out of the Bankruptcy Court in Western Michigan denied the debtor’s motion to avoid a judgment lien where the lien was filed against “any future interest in real property” and the Debtor owned none at the time of the filing of the bankruptcy proceeding.

 

MICHIGAN BANKRUPTCY & JUDGMENT LIEN DISCHARGE: THE BOTTOM LINE

 

The bottom line is that, if you are considering filing for bankruptcy and you have a judgment lien against your property, it pays to retain an experienced bankruptcy attorney to assist you. The odds of successfully filing, serving, and prosecuting any sort of motion are drastically decreased without capable professional assistance.

 

The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13 in Michigan.