How Mortgage Liens May Affect Bankruptcy

If you have entered bankruptcy because of financial problems and inability to pay your debts, you may have some remaining personal property such as a house or other land that is subject to a mortgage payment.  Because you have been falling behind on your bills and have been unable to pay, you may find that there have been mortgage liens placed on your mortgage that are causing an issue in your bankruptcy proceedings.  How do mortgage liens affect bankruptcy, and what can be done to resolve them?  You have several options to resolve a mortgage lien when faced with this situation.    

Understanding Mortgage Liens     

A lien is a creditor’s claim against property you own.  That property is called collateral, and it is what secures the debt so that the creditor can receive some recompense if you fail to pay.  A mortgage lien is placed against your mortgage in order to make sure that your creditor will receive first chance at any opportunity to recover the money they are owed. 

There are different types of mortgage liens:

• Tax liens for failure to pay property taxes;
• Judgement liens that come because a court has issued a judgment against you and wishes to collect the fines; and
• Liens from second mortgages.

Options for Resolving Liens

Your options when faced with resolving these liens are to either avoid the liens if they are against property which has been exempted by the bankruptcy court – for example, if you have filed for Chapter 13 and are being allowed to keep your house subject to a successful repayment plan being drafted and followed by the court.  You can also choose to redeem the liens by paying the full value to the creditor who has filed the lien against you.  This is typically not an option if you are already facing bankruptcy, because you are usually filing due to lack of ability to pay back debts.

Your other options are to reaffirm the debt, and come to a mutual agreement with your creditor as to the amount that is owed and that which you can pay back.  This is often the case in Chapter 13 bankruptcies, where the courts help you reach an agreement with your creditor to repay a reduced amount over a period of time.  One final option is to surrender the collateral – in this case, the property on which you have the mortgage – to the creditor in exchange for forgiveness of the liens.  This occasionally happens during Chapter 7 bankruptcy proceedings.

Getting Help

If you have mortgage liens on your property and are facing bankruptcy, consult with an experienced bankruptcy attorney. Your attorney can help you determine how to handle those liens and what you can do to ensure that you manage the liens in the best way possible in light of your bankruptcy.