As you pursue a plan to consolidate your debt and pay creditors over several years in a Chapter 13 bankruptcy, you may be able to avoid liens against your secured debt.
Many debtors who are going through bankruptcy utilize “lien stripping” to avoid repaying second mortgages on their real property as well as other debt. However, what happens to liens in a Chapter 13 bankruptcy?
Applying the many requirements and nuances associated with removing, or “avoiding,” liens in a Chapter 13 bankruptcy requires a knowledge of the federal Bankruptcy Code and court cases that have established the rules. In Florida, the Loan Lawyers of Fort Lauderdale can help you to get liens discharged and avoid judgment liens as part of a Chapter 13 filing.
Contact Loan Lawyers for your free, no-obligation consultation about filing bankruptcy. Discover how we can help you get out of debt and restore your financial standing through Chapter 13 bankruptcy or other debt mitigation options available to you.
What Happens to Liens in Chapter 13 Bankruptcy?
In a Chapter 13 bankruptcy case, debtors establish a three- to five-year plan to pay their secured debt, such as mortgages and car payments and outstanding tax obligations. The debtor’s disposable income, if any, is paid to unsecured creditors, and certain unsecured debt is discharged (forgiven).
A lien is a legal claim against a person’s property or assets to secure payment of a debt. The lien allows the creditor to seize that property if the debt is not paid. Liens are often attached to real property and car loans. If the borrower defaults on their mortgage, for example, the lienholder can foreclose on the property and sell it to recover the money they are owed.
A lien on a loan is known as a “voluntary lien.” By taking out a loan to buy a house, car, or some other real or personal property, you voluntarily agree to put the property up as collateral on the loan. A lien may also be characterized as an involuntary:
- Statutory lien, which is a debt established by law, such as a tax lien
- Judgment lien, which is established by court order, such as in response to a creditor’s lawsuit seeking payment of an unsecured debt
So, what happens to liens in Chapter 13 bankruptcy when the process is successful? At that point, voluntary and statutory liens are satisfied, or “cured,” as the debtor pays down their secured debt and taxes, but judgment liens can be “avoided.”
What Is ‘Lien Stripping’ in Chapter 13 Bankruptcy?
In most cases, liens against your secured debt will not be discharged in a Chapter 13 bankruptcy. For example, the U.S. Supreme Court has established that a mortgage cannot be discharged in a Chapter 13 filing (Nobelman v. American Savings Bank, 508 U.S. 324 (1993)).
However, the ruling in Nobelman does not apply to second or third mortgages. A federal appeals court later said in McDonald v. Master Financial, Inc., 205 F.3d 606 (2000) that when a homeowner is “upside down” on their mortgage, meaning they owe more on the home than it is worth, junior mortgages are essentially unsecured, since satisfying the primary mortgage would require all of the home’s value. Therefore, second and third mortgages, also known as “home equity loans,” can be discharged as unsecured debt under Chapter 13 bankruptcy rules.
So, if you have taken out a second or third mortgage — a loan based on your home’s equity — and your total mortgage debt is more than the home is worth, you can ask the Bankruptcy Court to strip the junior lien(s) from your primary mortgage lien as part of your Chapter 13 reorganization. This converts it into unsecured debt. Then, when you have made all payments required by your Chapter 13 payment plan, you can ask the court to discharge your remaining unsecured debt.
Can Judgments Be Discharged in Chapter 13?
In some cases, the Bankruptcy Court will discharge a judgment — a court order to make payment — as part of a Chapter 13 bankruptcy. However, certain judgments can never be discharged, including orders for the following:
- Child support payments
- Alimony
- Criminal fines or restitution
- Repayment of overpaid government benefits
Judgments, or judicial liens, typically result from a lawsuit. After winning the lawsuit, the plaintiff asks the court to apply a lien to the defendant’s property to ensure the money awarded in the lawsuit is paid. Judicial liens often conclude a suit to foreclose on a debtor’s home.
As part of a Chapter 13 bankruptcy, your bankruptcy attorney may file a Motion to Avoid Judicial Lien, which asks the court to dismiss an involuntary judgment lien on your mortgage once you have completed your payment plan.
A Motion to Avoid Judicial Lien on your mortgage would claim that the lien impairs your right to claim your home as exempt from seizure while in bankruptcy. This works because Florida’s homestead exemption protects a debtor’s primary residence from seizure regardless of its value if the property meets specific criteria, including the following:
- The property is not larger than a half-acre in a municipality or 160 acres in an unincorporated area;
- The individual has owned the property (had a mortgage) for 1,215 days (3.32 years) before they filed for bankruptcy; and
- The property is under the individual’s name, not held by an entity like a corporation, partnership, or irrevocable trust.
It is also possible to avoid judicial liens on other exempt property, such as your primary motor vehicle. Florida’s motor vehicle exemption allows a debtor to protect up to $5,000 in motor vehicle equity while in bankruptcy. A Motion to Avoid Judicial Lien would claim that the lien on your car loan impairs your ability to exercise this right.
Why You Need an Avoiding Judgment Liens Lawyer in Florida
Lien stripping and avoiding judicial liens are strategies an experienced Florida bankruptcy lawyer can apply to remove claims on your property in a Chapter 13 bankruptcy. An avoiding judgment liens lawyer from Loan Lawyers Law Firm can identify the types of liens on your property and work with you and your financial circumstances to develop a plan to address them effectively.
More than that, avoiding liens in a Chapter 13 bankruptcy can be part of a broader plan designed for your financial recovery. Our firm has eliminated over $100 million in debt and mortgage principal for clients across Florida, and we can apply our unique and multifaceted approach to resolving your debt problems as well.
There are many paths a homeowner may take to financial recovery through bankruptcy, foreclosure defense, loan modification, or other legal rights and protections. Working with an experienced South Florida debt relief law firm can help you determine the most suitable option for your situation.
Contact Our Chapter 13 Bankruptcy Attorneys in Fort Lauderdale for Help
The Fort Lauderdale bankruptcy lawyers at the Loan Lawyers Law Firm can guide you through a Chapter 13 reorganization and help you avoid liens to protect your home and other important property. Trust our experienced total debt solution law firm with a proven track record of success to help you regain financial stability and restore peace of mind.
Call Loan Lawyers today or contact us online for a free, confidential consultation about your legal options for protecting your assets.
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Loan Lawyers is made up of experienced consumer rights attorneys who use every available resource to develop comprehensive debt solution strategies. Our goal is to take on those burdens, resolve those problems, and allow our clients to sleep soundly knowing they are on the path to a better future.
