Bankruptcy Avoids Judgments That “Cloud” Your Rights

02 Feb Bankruptcy Avoids Judgments That “Cloud” Your Rights

Sun_And_clouds“Anything that casts a cloud or diminishes the value of of an exemption is suspect and can be avoided.”  Those simple words are important to people facing bankruptcy.

The fresh start in bankruptcy is real.  And sometimes it takes judges to clear the way for it.

In this particular case, a creditor had a judgment against a husband.  He owned a home with his wife through a Missouri “tenancy by the entirety.”  In states where this is allowed, it means one spouse cannot expose the house to creditors without the other’s consent.  So no mortgages or other loans against it — and no judgment liens unless both spouses owe the debt.

When the husband filed bankruptcy, he asked the court to issue an order avoiding the potential lien of a judgment creditor because it might impair his entirety exemption — his right to enjoy the property free of any claim of that creditor after bankruptcy.  The creditor argued slightly different positions in trial and on appeal but, basically, they said, “Hey, our judgment doesn’t affect your property right now so you can’t ‘avoid’ it.”

This creates a regular issue for many consumers though.  In the simplest case, the judgment is still a public record.  When refinancing, future lenders are often worried the judgment could ‘attach’ to the property and will not make a loan until the judgment is paid or removed.  They may be mistaken but they are being cautious.  And of course if the debtor gets full title in his name alone through divorce or inheritance, then it is even more difficult to straighten out.

The 8th Circuit’s bankruptcy appellate panel decided that the language and purpose of the provision avoiding judgment liens that impair exemptions — Section 522(f) — was to remove such “clouds” on the debtor’s full right of exemption.  “In Congress’s mind, a judgment should not impair an exemption in any sense.”

No one wants to file bankruptcy and, if they have to, the fresh start  should not be a hypertechnical thing only lawyers can understand — it should be real and broad and meaningful.  And sometimes judges help to make that true.

The case is In re O’Sullivan, 15-6020 (8th Cir. BAP 1/19/16)

Photo Credit:  Sevast99

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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