What Should I Know About Bankruptcy And Liens?
Bankruptcy and Family Law Attorney in Coeur d’Alene
Serving Coeur d’Alene & Kootenai County Areas, including Coeur d’Alene • Hayden
The fresh start the bankruptcy provides extends to avoiding liens on your assets. The ability to avoid a lien is a modification on the standard rule that says that liens pass through bankruptcy unaffected. For liens to be avoidable, they must be judicial liens – for a judgment or a garnishment, for instance – or an interest in household items or tools held by the debtor. Statutory liens such as tax liens are not avoidable in Chapter 7, even if exemptions are impaired because of them; they can be avoided in Chapter 13 if the lien is more than the value of the asset. Liens that impair exemptions can be avoided in both Chapter 7 and Chapter 13 proceedings if there is not enough equity in a home after deducting the mortgage to pay both the homestead exemption provided under Idaho bankruptcy exemption rules and the lien. In most cases, liens are only avoided in part, to make certain that the debtor receives the full value of the homestead exemption; avoiding liens reduces them most of the time. Any part of a lien avoided is dismissed forever so long as the plan is completed and/or the debtor gets a discharge.
There are limitations to lien stripping. According to the Bankruptcy Code, voluntary liens secured only by the debtor’s residence cannot be stripped of the liens. When a mortgage on a home is under-secured, property cannot be set to present market value the way some vehicles can. Voluntary liens are deeds of trust, home equity lines of credit, and mortgages, while involuntary liens are judgment and tax liens. In Idaho, mortgage liens can be stripped if there is no value securing the loan to be stripped.
If a bankruptcy petitioner is eligible for Chapter 13, the next step is knowing whether a creditor has a lien; whether the debt is secured. Common secured debts are mortgages, car loans, and equity lines of credit. These are liens created by a legal agreement between the borrower and the creditor, but there are other kinds of liens that can be attached to property without the borrower ever realizing it. This can happen if you finance a large purchase, and is usually triggered by a clause in the borrowing agreement that allows the seller to retain rights to the property. If you bought the same item with a regular credit card not associated with the seller, the goods are yours to keep after discharge. These are typically goods such as jewelry, musical instruments, tools of the trade, household goods, appliances, or health aids. It is only possible to avoid or strip a lien in these cases in Chapters 13 or 11 reorganizations, by putting a value on the goods equal to present value. Sellers with a lien on such goods almost never file a lawsuit to recover those goods, mostly because they are more interested in you paying for those goods than getting the items back. To get consumers to pay for items with little or no market value, many of these department store credit firms rely on your fear of the item being repossessed. These liens can be avoided if the lien is attached to the goods and if you file a motion describing statutes under which you’re entitled to avoid the lien and have it served on the creditor. If you could have claimed an exemption for some property that, under a lien or garnishment, has been repossessed within 90 days of filing for bankruptcy protection, that property may be able to be recovered. In all cases, stripping a lien in bankruptcy means that the value of the asset must be valued at less than the amount of the lien. The amount of the lien that exceeds the value of the asset is considered unsecured debt.
Liens due to taxes can be avoided in bankruptcy reorganizations, such as in Chapter 13 and Chapter 11 cases insofar as liens cannot attach to property’s equity. Priority taxes can be secured claims if a tax lien has been recorded. If such a tax claim has a secured status then the claim would be entitled to interest. No matter the circumstances, even if a tax is non-priority and dischargeable, taxing entities always have the right to enforce liens. Though liens can’t be avoided in Chapter 7 cases, the court can figure a secured amount for the lien when you file, and paying that sum entitles you a release of the lien.
Lien stripping is most often used to reduce liens on cars to the vehicle’s present value. A plan must account for full payment of the remaining secured debt while the unsecured (stripped) portion of the debt can be reduced to little or nothing amid other unsecured debt payments under your plan. The 2005 amendments to the bankruptcy law have made some changes to the laws regarding lien stripping on vehicles. Most notably, new limits have been added to restrict vehicle lien stripping on cars purchased within 910 days of filing for bankruptcy protection.
After debt discharge through Chapter 7 bankruptcy protection, you have some choices as to what happens in regards to IRS tax liens that survived discharge. You can pay the IRS the value of the asset’s equity; you can ignore the lien if the asset is of lesser value than the lien or is exempt from IRS levy; or, if the asset has value above the lien’s value, you can file Chapter 13 and make payments on the lien.
If a creditor has received a judgment against you, the creditor must generally also then file the judgment to create a lien against your property. Recording an abstract judgment in Idaho gives the creditor with a judgment against you a lien on all real estate you own in the county. If the judgment is filed with the Secretary of State, the creditor will get a lien against all your personal property. It is important to know whether the judgment lien has been perfected – that is, secured by some asset – since secured debts are figured separately from unsecured debts when determining if a debtor is eligible for Chapter 13 bankruptcy protection. Interested in learning more on bankruptcy and liens? Contact one of our bankruptcy or family law attorneys to schedule a free phone consultation.