A major source of confusion among people who file for bankruptcy is whether debts on which there is a judgment or lien can be removed (or discharged) in a bankruptcy case.
Part of the confusion comes from misuse of the the terms judgment, lien, and discharge.
Whether a debt is dischargeable or not depends on the type of debt it is, and how it was incurred. For example, debts incurred through fraud are not dischargeable. Neither are certain tax debts, domestic support obligations, or student loans.
For more information on which debts are not dischargeable, see http://www.bklaw.com/discharge.html
A Judgment is Not a Lien But a Lien Can Be Created From a Judgment
A judgment and a lien are not the same thing.
A lien is a right to get paid from a specific asset/property.
A judgment, however, is merely a court order that allows a creditor to pursue collection actions against someone (including creating a lien against assets). Depending on the laws of the state involved, such collection actions can include getting a lien against property, or wage garnishment, or seizures of bank accounts, etc.
But as far as discharge in bankruptcy goes, a debt on a judgment is no different than any other debt that doesn’t yet have a judgment–they are dischargeable in bankruptcy unless they meet one of the exceptions set forth in 11 U.S.C. 523, as described above.
Liens Remain Against Property After Bankruptcy Unless Removed
A “judgment lien” is simply a lien that results from recording a judgment, as described above (as opposed to a lien created voluntarily, such as a mortgage). This lien will remain against whatever property it is “attached” to on the date the bankruptcy case is filed after the bankruptcy discharge has been entered, unless it is specifically avoided (removed) in the bankruptcy case.
A judgment lien¹ is not automatic.
First, the creditor must obtain a judgment from the court.
Then, to create a lien, it must be perfected under applicable non-bankruptcy law (usually the state or county in which the asset is located). For real estate, this usually involves obtaining a certified abstract of the judgment from the court that issued it, and recording it with the county recorder’s office wherever the property is located that the creditor wants the lien to attach.
Sometimes Judgment Liens Can Be Removed in Bankruptcy
So, can one get rid of (avoid) a judgment lien in a bankruptcy case? If certain requirements are met, yes.
The bankruptcy code section that states this is 11 U.S.C. 522(f), which allows a lien to be removed to the extent that it impairs an exemption to which the debtor would have been entitled in the absence of the lien.
This is basically a mathematical calculation, and depends of course on the value of the asset, the amount of any senior liens, and the amount of the available exemptions (usually governed by the laws of the State where the bankruptcy case is filed, but not always), as well as when the lien attached to the property. To see more on exemptions, visit http://www.bklaw.com/exemptions.html.
The bottom line is that if you have a creditor who has obtained a judgment lien against you, be sure to tell your bankruptcy attorney so he/she can assess whether or not it can be removable in your case. This can also be done after your bankruptcy case is over, but there are limits and it requires additional legal fees to reopen your bankruptcy case.
¹ A judgment lien is an involuntary lien. This is distinguished from a voluntary, or consensual lien such as a mortgage or a security interest granted to purchase a vehicle. The lien avoidance procedure referenced above only deals with involuntary judicial liens.
image by afagen