Chapter 7 Effect On Liens
Liens normally remain. One of the most fundamental protections for creditors under Chapter 7 is the fact that liens normally pass through Chapter 7 unaffected by the debtor’s discharge.
Types of liens. A lien is a security interest affecting some type of property owned by the debtor. Most typically in a bankruptcy case it is going to be a lien or a mortgage secured by the debtor’s residence or other real property, or the title slip to a motor vehicle that has money owed on it. Purchase money security interests in appliances and furniture are also common examples of assets that may be subject to a lien. Basically, a “lien” is usually found on something that the debtor has not finished paying for. When the debtor files bankruptcy, the debtor can usually keep such assets, provided that the debtor continues to pay for the item and honor the original contract.
Avoiding liens . Some liens are avoidable (removable) by the debtor, but to avoid such a lien special action must be taken in the court. It does not happen automatically, and it is the debtor’s burden to prove in court that each of the circumstances that legally permit the court to make an order avoiding such lien in fact exists. Generally, liens can be avoided against assets but only to the amount of any exemption that the debtor was entitled to claim on the asset, and provided that the lien arose as a judgment lien, or as a nonpossessory, nonpurchase money lien on certain kinds of household goods and personal effects belonging to the debtor. The terms “nonpossessory, nonpurchase money” means that the debtor already owned the asset before it was ever pledged as collateral for the debt, and the creditor did not keep possession of asset as security for the debt.
Examples: Jewelry held in pawn is not subject to such lien avoidance, because a pawn broker keeps possession of the jewelry until the loan is paid, thus the lien isn’t nonpossessory; A debtor who has borrowed money from a loan company by using home furniture and appliances as collateral for the loan can usually avoid the lien, because such furniture and appliances are usually exempt, the debtor did not use the borrowed money to buy the assets that are being used as collateral, and the debtor did not have to surrender possession of the collateral until the loan is repaid – and thus the necessary elements of a nonpossessory, nonpurchase money lien against exempt property have been met; a judgment lien recorded against the debtor’s house is usually avoidable to the extent of the equity that would have been exempt in the absence of the judgment lien, because the lien is a judgment lien, (as opposed to a voluntary mortgage which normally is not avoidable).
Statutory liens are not avoidable by the debtor. There are certain liens called statutory liens that the debtor can not avoid. Examples are tax liens and mechanic’s liens.
Caveat: Certain liens against exempt property are avoidable by the debtor, but the lien avoidance does not happen automatically. The debtor must take affirmative legal action in court to secure an actual court order avoiding the lien, or else it remains against the debtor’s property and can still be enforced by the creditor, after the case is closed, even though it could have been avoided during the case.
Reopening a closed case. The court will usually permit the debtor to reopen a case so that the debtor can pursue relief that could have been sought, (but perhaps was overlooked), during the bankruptcy. For example, during the bankruptcy case the debtor might not have been aware of a judgment lien, and only learned about the lien several years later. In that case the debtor might seek to reopen the closed case to then file a motion seeking to avoid the lien.