08 Apr After I File Bankruptcy, Can I Keep My Stuff? Part Two
Before you file bankruptcy, you want to know what will happen to your stuff. In Part One, I touched on the idea of exempt property. Exempt property is property that is not subject to the claims of creditors or a bankruptcy trustee, i.e., it is “exempt” from seizure. But what if a creditor has a lien, such as a judgment lien, on property that would otherwise be exempt? In many situations, a lien that you grant to a creditor, or a “consensual” lien, takes precedence over your exemption. For example, you may be entitled to claim a homestead exemption in your residence, but if you give a creditor a second mortgage, that lien may eat up all the equity that would otherwise be exempt.
There are, however, some types of liens that the Bankruptcy Code allows you to get rid of, or “avoid,” if the lien affects property that would otherwise be exempt. There are two types of liens that can be avoided in bankruptcy if they impair an exemption– non-purchase money liens in household goods, and judicial liens, also known as judgment liens or execution liens.
Non-purchase money liens are pretty much what they sound like–the lien was not to finance the purchase of the property in question, but was granted in items the debtor already owned. For the most part, household goods are pretty much what they sound like, too–the kinds of things most of us have in our homes. The typical non-purchase money security interest in household goods is a loan from a finance company, where household goods are pledged as collateral. In order to take advantage of the avoidance provisions, most jurisdictions require that a motion be filed with the court in order to avoid the lien. While disputes occasionally arise about whether a lien is non-purchase money, or whether something qualifies as household goods, for the most part these motions are handled as a matter of routine. The reality is that this type of collateral has no significant value to secure the loan, and these issues are seldom worth litigating.
Perhaps more significant is the opportunity to avoid a judgment lien that impairs a homestead exemption. If creditors have obtained judgments against you, those generally become liens on your real property, and can make it significantly more difficult to sell or refinance your home. This type of lien avoidance usually requires that a motion be filed with the court. That motion is largely mathematical in nature, and the exact outcome will depend on the value of the home, the amount of other liens, the amount of the homestead exemption, and whether there are any co-owners of the home. In some cases the lien may be avoided altogether; in others, the lien may remain in place but in a fixed (and reduced) amount. This is one of the most important parts of your bankruptcy to get right, and one of the most difficult to handle without the assistance of experienced bankruptcy counsel. You are also a vital part of this equation, because your attorney relies on you to disclose the existence of judgments.
In Part Three, I will try to deal with the issues of reaffirmation agreements, and the related topic frequently referred to as the “ride through” or “pay and drive.”
Bankruptcy Law Network (BLN)
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