Filing for bankruptcy is always an excellent way to manage various types of debts. But things get complicated if the lender has an interest in your asset because it means they have rights against it. In case you fail to pay the debt, they will sell the property to satisfy the debt. Fortunately, you can remove bankruptcy lien when you register for bankruptcy, but this depends on many factors like the kind of lien and assets used as a guarantee. At the Los Angeles Bankruptcy Attorney, we have explored various options to eliminate bankruptcy liens.

Understanding Bankruptcy Liens

Whenever lenders are issuing out loans, especially the ones that involve the purchase of costly property, minimizing the risk of losing money is essential. You get into an agreement with the lender that if you fail to repay the debt, they will take the property you have bought and sold it off to satisfy the debt. The ownership right the creditor has against the assets is what is known as a lien.

Take note that the universal rule of California statutes is that liens remain unchanged even after bankruptcy because there is no way of removing a lien through bankruptcy. The creation of a lien happens through an arrangement or law. Creditors attach a claim on the property that acts as collateral for the loan.

After the creation of a lien through consensus, you and the creditor get into a contract.  When the lender decides to extend you the loan to buy a house, you reach an agreement to afford the creditor a lien called mortgage on the household. In the event you are incapable of repaying the debt, the mortgage gives the lender rights on the house. With lien rights on the property, they can foreclose and sell the house through auction to settle the debt.

If a lien arises by the law, it doesn’t have to be consensual, and you don’t even need to know about it because it is non-consensual. Liens created this way are common among people who fail to pay taxes to the federal or state government. The IRS can place the lien on your assets so that if you are entirely unable to clear the unsettled taxes, the property can be disposed of to satisfy the outstanding balance. Besides, if the creditor takes you to court for unpaid debts and gets a ruling against you, the judgment creates a non-consensual lien on the assets.

Essential Terms to Understand in Bankruptcy Liens

To understand bankruptcy liens well, you should understand the following terms:

Secured and Unsecured Debt

A secured debt is one where the creditor places a lien to property, guaranteeing payment of the loan. An unsecured debt, on the other hand, is one where you, as the borrower, are not required to guarantee repayment of the loan by putting up your property as collateral.

Collateral

The property that you use to guarantee a loan is what is known as collateral. And a creditor places a claim on the collateral until you clear your debt obligation. In the event you can’t repay the loan, the lien provides the lender rights against the property and can foreclose it or seize it to settle the debt.

Keep in mind that although most liens are voluntary, sometimes they might be created without your consent.

Types of liens

When it comes to liens when declaring bankruptcy, it’s critical to understand the various forms of security the lender has on the property. Hold on a property can fall under numerous categories which include:

  1. Voluntary Lien

Voluntary lien involves giving a creditor interest or right on your assets. If the money you are borrowing is for purchasing a vehicle, the car will secure the loan. The same with property, if you take a mortgage to buy a household, the house becomes collateral for the debt. Through this type of lien, you persuade the lender to offer you the loan because your property will act as collateral. In the event you are inept of paying the money as per the contract, the house or car will be seized and sold off to settle the outstanding loan.

  1. Non-Consensual Loans

Just like the consensual or voluntary lien, non-consensual liens give the creditor rights against your property. However, the two are different because non-consensual rights don’t require consent, and you don’t even have to be aware of its existence.

These kinds of liens can be constitutional or judicial. California law is the one that establishes statutory claims while court actions create judicial liens. Statutory liens take various forms which include:

  • Landlord liens. These liens apply to business properties, and they allow tenants to recover the rent owed in the event a tenant declares bankruptcy. Landlords can attach a claim on machinery in your business or inventory so that when you fail to pay rent, they can sell off the stock or machinery to clear the outstanding debt. To prevent landlords from exercising these lien rights anyhow, landlords must meet stringent conditions.
  • Tax Liens. To help recover unpaid taxes, the state and federal government can grant taxing authorities like the IRS liens on your possessions. In California, liens usually attach to the property with unpaid taxes. Other tax liens, like federal payable taxes, can be placed on everything that you own, including personal property and real estate.
  • Mechanic Liens. When a contractor, sub-contractor, or supplier of construction materials works with a developer, he or she risks being unpaid. Mechanics liens help those in the construction industry secure themselves against outstanding construction debts. The purpose of this form of claim is to enable the forceful selling of a particular property to get paid. Take note that there are laws that oversee the nature of the task that is eligible for this form of lien. If a property owner feels that the contractor has not done the work to the quality stated in the contract, the owner can challenge the lien. In case the work by a contractor doesn’t live to your hopes, you can also contest the security on the property.

  1. Judicial Liens

A lender acquires a judgment lien done by court action. And although a court-ordered lien can be affected by federal or state laws when determining the property, the lien should be attached to and the procedures for enforcing the liens, they still don’t qualify as statutory liens. The reason being they are granted through court action. Some of the types of judgment liens include:

  • Garnishment liens. These are also known as attachment liens and are attached to your money or property. When holding a lender’s capital, the court can grant the creditor an attachment order, thus placing liens to your wages or bank accounts. The lien stays effective until you satisfy the debt, or when the court allows you to use the money or not.
  • Child Support Lien. In case you haven’t been paying past-due child support that has been ordered by the court, the custodial guardian may attach a claim on your assets. Although liens might be placed automatically, in most cases, the creditor must go through a court process. Following court procedures will ensure the creditor gets a perfect lien.

Credit Card Debts and Judicial Liens

As mentioned earlier, liens are not created the same way. A lender establishes a judgment or judicial lien when he or she seeks a court action and is granted a money judgment that isn’t in your favor as the borrower. The money judgment automatically gives the creditor a lien against your property.

The process of judicial claims in credit card debts begins when you fail to settle an obligation for unsecured debt. And because credit card debts or utility bills are not secured by collateral, the lender can’t force you to make payment. Instead, they have to sue you in court and get a judgment in their favor so that they can place a claim on your belongings and satisfy the debt.

Note that litigations come with huge costs, which means a creditor will not move to court for any amount owed. For them to move to court, the amount owed must be reasonable to justify the amount of money that you will incur in the litigation process. If the amount is large enough, the lender can file a civil lawsuit against you, the borrower. Failure to respond to the suit will result in a default judgment, and the creditor will be granted a money judgment allowing them to attach a claim on your assets. If you respond to the lawsuit, but the outcome of the case isn’t in your favor, the money judgment will still be in support of the creditor.

Once the judgment has been granted, the creditor must follow the steps provided by the law to create a perfect lien, one that is enforceable. To make a lien enforceable, you will follow all the guidelines outlined in the law or record the judgment with the recorder’s office. A creditor will perfect the lien, and sell the property within the jurisdiction of the recorder’s office where they recorded the judgment. The interest on the property is then settled from the proceeds of the sale.

The company handling the transaction is the one that counters checks to see if any judgment has been recorded before dispersing the proceeds of the sold property to the home seller, who, in this case, is the borrower.

Besides, most borrowers exempt specific property like household or vehicles, so that the lender cannot attach liens to them in case you are incapable of clearing the debt. Where you have exempted your personal property apart from your real estate, a creditor is likely to get a judgment that allows them to attach liens to your bank accounts or wages. That way, they can withdraw the outstanding balance of your debt obligation from your bank accounts, or deduct a certain amount from your wages until they satisfy the debt.

Liens in Chapter 7 Bankruptcy

Declaring bankruptcy eliminates several liens. But things don’t always go smoothly, particularly if the creditor has placed a lien against your property. Sometimes, the lender’s lien might remain unchanged even after declaring bankruptcy under chapter 7. After the end of the bankruptcy period and the debt is still owed, the lender seizes or forecloses your property to secure the loan.

In some incidences, after seizing your property, the creditor might sell it off to satisfy the loan. If the auction value of the assets is fewer compared to the amount of owed, you as the borrower will need to clear the remaining balance of the loan, which is usually known as a deficiency balance. It is somehow challenging to understand what ensues to liens in this chapter bankruptcy because regulations forbid deficiency balances in certain types of transactions. 

However, what is critical to note about this bankruptcy is that it can help you eliminate the obligation to wage a secured loan like a mortgage. When you register for bankruptcy under this chapter, you will clear all the debt, including the deficiency balance. But it’s only until you clear all the loans that you get to retain the property.

A tenable transaction will have two parts, one for personal responsibility to pay and the other one for lien rights.

Your Obligation as a Debtor to Pay the Lender

When you borrow money or incur debt, you have a responsibility to pay all the amount you owe. The duty to satisfy a debt is separate from the creditor’s lien rights. Once you declare bankruptcy, your obligation to repay the money you owe is wiped out, but only if it is eligible for bankruptcy release. That way, the lender cannot sue you later to satisfy the debt or use judgment liens to deduct funds from your income or withdraw cash from your accounts to clear the debt.

Right of Lender to Use Liens to Recoup Collateral

Your creditor possesses lien rights that enable them to satisfy the outstanding balance of the loan by selling off the property used as security to secure the loan. If a creditor has a lien like a mortgage, the lien gives the lender rights against the property. The lender can repossess the property and sell it off in the event you fail to meet the terms of payment. Where the assets are unavailable, the lender should seek court action for the price of the collateral. Remember that even after you transfer ownership of the property, lien rights will still be attached to it. Also, note that bankruptcy on itself cannot eliminate a lien. 

For instance, you buy a table from a local furniture store then agree with the seller that you will settle the amount within the next year. Further, the contract you sign states that your creditor, in this case, the furniture outlet, has a security interest on the table and can seize it when you are late for payments by more than two weeks. Here, the debt is secured, and you have personal responsibility or requirement to repay it. The legal obligation by the creditor (Furniture Store) to have a security interest over the table or repossess it is called the lien right. 

When you declare bankruptcy in Chapter 7, the bankruptcy will remove your obligation to pay for the table. But bankruptcy won’t eliminate the creditor's lien rights because they can repossess it when you can’t pay.

Also, take note that although bankruptcy might not help you disregard a lien, filing for bankruptcy is still critical. It is essential because it relieves you from the liability to pay the debt. The bankruptcy will even clear the balance and also enable you to escape the tax obligation evaluations. Keep in mind that even after the creditor pardons you the outstanding amount after auctioning your property, the law taxes the forgone debt because it considers it income. The taxes increase, resulting in vast amounts of taxes.

Circumventing Liens in Bankruptcy

In case you want to avoid judicial liens, bankruptcy is the way to go. A judicial lien, also called a judgment lien, is a non-consensual lien and applies to property like a house or car. To avoid the lien, you must meet individual requirements. These are:

  • The lien must stem from a money judgment after a creditor has sought court action.
  • You must be eligible to exemptions for part of your ownership in the assets
  • In the event the property is foreclosed, the lien will result in full or partial loss of the property.

If these conditions are present, you can remove any type of lien from your personal property or even the real estate.

Other Ways of Lien Avoidance

You can eliminate or limit a lien attached to your property, but first, the court must put into account the form of lien in question.

Besides, when you effectively satisfy the debt or outstanding balance, the creditor will agree to clear the lien. The creditor will first present the issue to the agencies who effected it, and after the lender removes the lien on your assets, their interest on the assets is wiped out, leaving you with the freedom to do as you please with it.

It’s also possible to eliminate a lien by yielding the asset the creditor has the lien rights on. Chapter 7 bankruptcy is the one that presents you with the best opening to submit the collateral to the lender.

Find the Right Bankruptcy Law Attorney Near Me

With several options of eliminating bankruptcy liens available, it can be confusing to pick the option that will work for you. So, if you want to eradicate these liens, reach out to the Los Angeles Bankruptcy Attorney at 424-285-5525. Our experienced attorneys will help you choose what suits you best.