Can Chapter 7 and 13 remove liens?
While in bankruptcy, you can remove liens from your property.
There are basically two types of liens: judgment liens and statutory liens. Statutory liens include mechanics liens, hospital liens and tax liens. These liens can be automatic and you may not know they have attached to your property. Judgment liens are only created after a creditor sues you and obtains a judgment from the case and files the lien with the county recorder.
Removing liens is slightly complex but can be handled by your bankruptcy attorney while you are in your open bankruptcy case. He or she will do this by filing a Motion to Avoid Lien and filing other documents along with the motion to get a judgment from the court.
How does it work?
The general rule is you can get rif of a lien when it is no longer secured by your property. The most common example is when your home value drops. For example, if you have a home that is worth 100k and you have a mortgage with a balance of 70k then you have 30k in equity. If you have a homestead exemption of 20k, then 10k remains available to secure any additional liens. If a judgment lien is 14k, then you can avoid up to 4k of the lien. This is because it impairs your exemption by 4k. If your mortgage is 80k, then after your exemption is taken into account, there is no equity remaining for the judgment lien to attach to and it can be avoided entirely.
What is a Purchase Money Security Interest?
When you buy a car or a home with financing, then the original loan creates a Purchase Money Security Interest or PMSI. These liens or collateral interests cannot be avoided in bankruptcy. However, you may be able to modify the balance on a car loan with a cram-down in Chapter 13. In some jurisdictions you may be able to do the same with your real property. Usually though, that can only be done with property that is not your primary residence.
Make sure to analyze the different liens on your property and work closely with your MyBankruptcyTeam attorney to find out if you can modify or remove the lien.
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