Judgments are a result of someone being sued and a court deciding that a debtor owes money. Once issued, a judgment can result in collection and enforcement actions being taken, including removing funds from a bank account, garnishing wages, or possibly even foreclosure of real estate. Therefore, it is important to evaluate a lawsuit before a judgment is entered.
Where real estate assets are concerned, a judgment can become a lien against a debtor’s real estate. However, if the debtor has filed for bankruptcy, he/she has a largely unqualified right to avoid any judicial lien that impairs an exemption, with the exception of certain family related debts. Exemptions are available to individuals under either state or federal statutes with eligibility determined under federal law based on a person’s domicile. The exemption statutes allow a person to protect property to the limits available under state or federal law whichever applicable.
A bankruptcy discharge resolves a debtor’s personal debt liability for most debts, but liens against a debtor’s property typically pass through bankruptcy and remain enforceable against property. Certain liens that impair an exemption to which the debtor is entitled may be subject to avoidance. These include most types of judgment liens and nonpossessory nonpurchase money security interests in household goods and items held for personal use. Liens arising out of a domestic support obligation, liens for taxes, consensual liens, and statutory liens such as HOA dues or mechanic’s liens are not subject to avoidance.
The avoidance of a lien essentially permits a debtor to strip the interest that a creditor has in particular items of property if the debtor’s interest in that same property is exempt but for the creditor’s lien or interest. Lien avoidance actions are usually brought by motion and there is generally no set time line for the filing of such motion by a debtor.
Additionally, a judicial lien is avoidable to the extent that the lien, plus all other liens on the property, plus the amount of the exemption that the debtor could claim if there were no liens on the property, exceeds the value that the debtor’s interest in the property would have in the absence of any liens. This means that a debtor who has no equity in a property, but can claim an exemption, may still avoid a lien. Where a lien only partially impairs an exemption, only that part may be avoided. Hypothetical costs of sale are not to be deducted when evaluating whether a judicial lien may be avoided.
A debtor may want to record a copy of the Bankruptcy Court’s order avoiding judicial lien with the County Auditor’s office where his or her property is located.