Lien Avoidance in Bankruptcy

The Bankruptcy Code defines lien as a charge or interest in property to secure payment of a debt or performance of an obligation.  Liens serve three purposes.  

1. A lien places the world on notice of the creditor’s interest in the property, thus preventing the property owner from selling or transferring the property without first paying off the lien;
2. A lien gives the creditor the right to foreclose on the property which is subject to the lien, sell it, and use the net proceeds of the sale to satisfy the debt; and
3. If a lien is properly recorded, it establishes the lien creditor’s priority in the property in relation to other creditors who may also have liens against it.

Liens are divided into two categories: 

• Consensual; and
• Involuntary. 

What is a Consensual Lien?

A consensual lien, also known as a voluntary lien, is a lien which the property owner agrees to have placed on his property.  Examples of consensual liens are: 

• Mortgages; and
• Auto loans. 

What is an Involuntary Lien?

An involuntary lien is a lien which is placed against a property owner’s property without his consent or against his will.  Examples of involuntary liens are: 

• State and federal tax liens;
• Property tax liens;
• Mechanic’s and materialmen’s liens; and
• Judgment liens. 

Lien Avoidance

The Bankruptcy Code gives debtors and the bankruptcy trustee to power to avoid certain types of liens.  Lien avoidance allows a debtor or the trustee to treat a secured claim as though it were unsecured if certain conditions can be met.  The result of lien avoidance is that a debt can be reduced or, in some instances, eliminated altogether. 

In Chapter 7 cases, whether a debtor can avoid a lien depends on several factors. 

1. Is the lien a purchase money lien or a non-purchase money lien?
2. Is the lien a consensual lien or an involuntary lien?
3. Is the debtor claiming an exemption on the property which is burdened by the lien?
4. Does the value of the exemption exceed the debtor’s equity in the property? 

A Chapter 7 debtor may not avoid a purchase money lien.  However, non-purchase money liens and judicial liens may be avoided by a Chapter 7 debtor to the extent they impair an exemption.

In Chapter 13 cases, generally a lien may be avoided to the extent that it is unsecured.  In other words, if the amount of the debt which is evidenced by the lien exceeds the value of the property, a Chapter 13 debtor may be allowed to avoid it by treating the portion of the lien that exceeds the property’s value as unsecured. 

Getting Legal Help

Lien avoidance is an extremely complicated process.  Moreover, the procedures for avoiding liens vary from jurisdiction to jurisdiction.  Therefore, a debtor who may have the right to avoid a lien should hire an experienced bankruptcy attorney who will represent him throughout the bankruptcy and handle all aspects of the bankruptcy case, including in lien avoidance proceedings.