What Happens to Property Liens in Bankruptcy?

: Reese Baker & Associates

  Filed under: Loans

When creditors obtain a judgment against a debt you owe them, filing Chapter 7 bankruptcy can discharge the debt. However, if the debtor has obtained a property lien, bankruptcy won’t automatically wipe it out. In essence, debt owed to a creditor and the lien created to secure that payment are separate.

Liens Explained

When a creditor seeks a judgment for a debt it typically comes with a lien, which is a notice attached to your property. In order to sell or refinance a property, the title must be “clear” which means all liens must be eliminated. Therefore, a property lien will allow the creditor to be paid from the proceeds if you sell your home. Property liens are a common form of debt collection used by creditors to collect on debt owed to them. Adversely, if your property lien meets certain criteria, you may be able to qualify for “lien avoidance” in order to remove liens after your debt for the lien has been discharged in bankruptcy.

Property Liens in Bankruptcy

In order to create a legally recognized lien on a property, the lien must first be “perfected”, which means that the correct judgment is obtained from the local court and it is properly recorded with the local county records office. The US Bankruptcy Code allows for judgment liens to be removed in certain cases provided that you didn’t agree to the lien as part of any settlement, you have equity in the property that you can claim a bankruptcy exemption against, and that the property lien adversely affects some or all of the equity that can be exempted under bankruptcy law.

Bankruptcy Lawyer Houston

Removing a lien requires the filing of a motion as it can’t be removed by a bankruptcy alone. Working with a Houston bankruptcy lawyer will allow you to protect your property and increase your chances of successfully removing the lien after your debt has been discharged in bankruptcy.