What does it mean to avoid a lien?
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UPDATED: Jul 16, 2021
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A lien on property usually acts as a barrier when a property owner is trying to sell something. When a person wants to avoid a lien, they obtain a judicial determination that the lien no longer encumbers a piece of property. This means they would then be able to sell the property despite the lien. In other words, a lien is seperate from a debtor’s personal obligation of the loan.
For example, suppose that you own Blackacre, an ancestral estate. It is presently worth $300,000, subject to a first mortgage of $180,000. Suppose that someone obtains a judgment against you for $30,000 and then obtains a lien against Blackacre. They are planning to force a sale of Blackacre in order to recover their $30,000, or else they’re planning to camp out at your next refinancing or sale in order to skim $30,000 off the top of whatever money you receive after the mortgage is discharged. Now you file bankruptcy, and let’s suppose that your state law provides a $200,000 homestead exemption. The judgment lien impairs that exemption (makes it less worthwhile). Therefore, the Bankruptcy Code allows you to avoid the lien, which means you will emerge from bankruptcy with Blackacre free and clear of that lien. However, the mortgage lien still exists because the Bankruptcy Code does not let you avoid voluntary or nonjudicial liens.
When taking out a mortgage, home equity loan, or home equity line of credit on a home or on some other piece of real estate, a debtor grants the lender a lien on that real estate. Even with no personal liability in bankruptcy to pay a mortgage, a lender will still need to be paid through the lien. The lien allows the lender to foreclose and sell the property if the debtor falls behind on payments under the loan. Bankruptcy, though, can help to stall or even prevent foreclosure. When bankruptcy prevents foreclosure, this is referred to as avoiding the lien.
A debtor can eliminate the lien in addition to eliminating personal liability on a loan without losing the property or home. However, this will require an approved exemption from the bankruptcy judge, and a showing that the property value is less than the lien value. To learn about bankruptcy exemptions, click this link.
It is also possible to avoid a lien and keep property through a discharge of personal liabilities and an agreement with the lender to resume making payments. This option may not be available to those who would have difficulty making further payments or who think they wouldn’t be able to stay current with payments in the future. This option would allow a debtor to avoid foreclosure.