26 Aug Judgment Liens: No Longer Avoidable in Southern Illinois Bankruptcy Court?
An old adage says that liens “pass through bankruptcy” unaffected. As old adages go, it’s right as much as it’s wrong. Particularly when referring to judgments against someone’s homestead which are normally subject to “avoidance.” But a July, 2012 court decision puts that in doubt for Southern Illinois residents.
The Bankruptcy Code provides that a consumer may “avoid” the fixing of a lien on their home obtained through a lawsuit’s judgment against them — a “judgment lien” — if it “impairs” the consumers exemptions in the home. So if the law provides the consumer with a $10,000 homestead exemption and they have $10,000 or less of equity in the home, then the consumer can ask the bankruptcy court to “avoid” the lien on her home. Many court also hold that you can avoid the lien “to the extent that” it impairs the exemption, even if you have more equity than the exemption (leaving the lien only existing to the extent of non-exempt equity). And, after 1994, most hold that a debtor can do so even if there is no equity.
However, in a little-noticed decision from July, 2012, Judge William Altenberger limited the Illinois homestead exemption and may have eliminated the right to obtain a judgment lien avoidance too. In the Kimberly Clemons case, the court considered the situation where a debtor had no equity in a home but asserted an exemption anyway. That is, the debtor’s home was worth less than the mortgage she had given on it, so there was no equity. She also claimed a homestead exemption in the property, while there was a large judgment (related to a mechanic’s lien claim) on it.
The court concluded that the debtor could not assert an exemption in her home because the Illinois exemption is limited to her “interest” therein which itself was limited to only equity in it. So if you have no equity, you have no exemption. Judge Altenberger based this position on a 1989 decision by Judge Meyers (In re Jennings, 107 B.R. 165) which reached the same conclusion about the motor vehicle exemption.
Now, as a general proposition, Clemons is much adieu about nothing. In most bankruptcy cases an exemption is simply the debtor’s way of protecting equity from the trustee’s liquidation to pay other creditors. If there is no equity, the trustee is usually not interested in the property, exempted or not.
But assuming under Illinois law that a mechanic’s lien judgment is not a variety of statutory or consensual (non-avoidable) lien under the bankruptcy law, the Clemons decision could have deleted judgment lien avoidance from Illinois bankruptcies. After all, the purpose of judgment lien avoidance is to vindicate a consumer’s exemptions as part of the fresh start. If you cannot claim an exemption in the property, you may not be able to avoid the lien. As the house increases in value or the mortgage is paid down, the lien will “attach” to more equity. And the judgment lien will have to be paid if the home is ever sold — in effect the debt would not really be wiped out for the debtor if they keep that property.
This conflicts with another Southern Illinois decision, In re VanZant (210 B.R. 1011, 1997). In that case, Judge Meyers found that 1994 amendments allowed a debtor to avoid a judgment lien on a home even where the debtor lacked any equity in the property to defend with an exemption. Although Clemons does not address VanZant, it seems unlikely that a judgment lien creditor would object to an exemption claim unless it was for the purpose of dodging a lien avoidance action. So Clemons seems clearly at odds with VanZant and may reverse it sub silencio.
Whether this was intentional is far from clear. The line of cases from Clemons back to Jennings and the Illinois state law cases appear to reference scenarios where a debtor was claiming an exemption in opposition to a consensually-granted security interest in the collateral.
But generally the states by statute or case law have all applied their exemption laws to exclude liens granted by the consent of the property owner — since the alternative would be to seriously impair the ability of consumers to borrow against their property at all. For example, the Illinois homestead provides exemption from “attachment, judgment, levy, or judgment sale…” but not “mortgage or pledge.” So the consumer can intentionally give up exemptions in property by using it as collateral for a loan.
If the line of cases that narrowed the Illinois exemptions were attempting to flesh out this concept, then they should be distinguishable in order to achieve the purpose of exemptions generally and the Code’s provision for lien avoidance. It is also entirely possible Clemons could be narrowed to apply only to mechanic’s liens, since these appear to be a hybrid of statutory and consensual liens — they are created by contracts in conjunction with a specific statute creating them — and would then do no violence to judicial lien avoidances for Illinois debtors. Time will tell.
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