What is a secured debt? Part 4 – judicial lien
By Chip Parker, Jacksonville Bankruptcy Attorney on Sep 10, 2007 in Benefits of Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Florida, General Bankruptcy Information
In Part 1, I discussed perfected security interest, such as home mortgages and car titles.
In Part 2, I discussed purchase money security interests (a.k.a. PMSI), such as store credit cards.
In Part 3, I discussed non-purchase money security interests (a.k.a. Non-PMSI), such as American General and Beneficial loans.
Another secured debt typically owed by a debtor is a judicial lien. A judicial lien is an involuntary lien obtained by a creditor as a result of filing a certified copy of a final judgment in the county in which the debtor owns real property. The issuance of a final judgment occurs as a result of an otherwise unsecured creditor, like a credit card company, getting a judgment against a debtor through a lawsuit filed in state court.
As a Florida attorney, I can only speak as to Florida’s exemptions. Florida’s Constitution specifically states that no judgment shall be a lien on a homestead (Fla. Const. Art. X, § 4), so the judicial lien technically only applies to non-homestead property. However, a problem arises when a judgment debtor attempts to sell her home. The buyer will usually not be able to obtain title insurance because of the appearance of the final judgment in the official records. Since the sale will fall through without title insurance, the judgment debtor will be forced to satisfy the final judgment to save the sale.
There is a very successful motion a bankruptcy debtor can file to wipe out the appearance of the judicial lien, known as a Motion to Avoid Judicial Lien. A Motion to Avoid Judicial Lien can be filed by a debtor in either a Chapter 7 or Chapter 13 bankruptcy. This is very similar to the Motion to Avoid Lien discussed in Part 3 of this series. However, there is an extra step involved.
Once the debtor’s attorney obtains an Order Avoiding Judicial Lien, which should specifically reference the homestead property using its legal description, a certified copy of the order should be obtained from the bankruptcy clerk and recorded in the official records of the county in which the homestead property is located. Years later, when the debtor is attempting to sell her home, the title insurance company will first locate the judgment and then will see where the bankruptcy court removed the lien. Title Insurance will be issued, and the sale of the home will be completed without satisfying the judgment.
So, an Order Avoiding Judicial Lien in a Chapter 13 will allow the debtor to treat the judgment creditor as unsecured, which will usually lower the Chapter 13 plan payment. In a Chapter 7, an Order Avoiding Judicial Lien will wipe out the debt altogether. Remember, however, to take the extra step of recording the order in the official records of the county in which the home is located!
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