16 Jul Liens and Bankruptcy
When I meet with a new client to go over their possible bankruptcy filing, I always ask about what they own–real estate, cars, etc.–and what claims are filed against it–mortgages, title loans, etc. Often, the client says that they don’t own any of these things. When I press a bit, I am told, “Well, the bank owns it; I just make the payments.”
It would be more accurate from a legal perspective to say, “I own it, but the bank has a lien on it.” What is a lien, and why does it matter?
Sometimes called “security interests,” a lien is a legal claim against something that you own. What you own is called the “collateral” for the loan. If you don’t make the loan payments, most liens let the lender sell the collateral, after following specific rules regarding documentation, timing and notice. Mortgages and car loans are the most common sort of liens that people agree to have placed against their property. There are also “involuntary liens,” such as court judgments, tax liens, mechanic’s liens, or homeowner’s association or condo liens, that are imposed even though you don’t want them.
All liens give the holder certain powers over the collateral. Apart from the ability to sell the collateral if there is a default, there are usually restrictions on sale or the transfer of title. For example, you can’t sell your car if there is a lien against it unless the lien is paid off, or give your house to your sister without the lien continuing to apply despite the change of ownership. Liens may show up on your credit report.
It is very important to let your bankruptcy attorney know about everything you own–even if there are liens on it–as well as any liens you are aware of. How your case is handled may depend on the type of lien that exists. Some liens may be able to be “avoided” or “stripped off” or “crammed down,” meaning that you might not have to pay them or may be able to pay less, in a bankruptcy case. It may also be possible that the lien wasn’t “perfected,” or recorded in the way or in the time your state’s laws require for it to be effective.
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