Certain liens can be avoided with a Chapter 13 bankruptcy filing. Section 255(f) states that a debtor may exempt judicial liens and non-possessory, non-purchase-money security interests in certain exempted items. If a lien is avoided, the secured creditor will be treated as unsecured. Only exempt liens can be avoided.

A lien can be avoided if it impairs a debtor’s exemption. This is calculated by taking the sum of the lien to be avoided, all other liens and the amount of the exemption and subtracting the value of the item. If you are seeking to avoid a $5,000 lien and all other liens and mortgages equal $250,000, and the value of the real property is $240,000, the impairment of your exemption is $10,000. Because the impairment of the exemption would be $10,000, which exceeds the lien of $5,000, the lien could be avoided.

Once you demonstrate a lien impairs your exemption, you still need to ascertain wither it can be avoided. Under section 522(f), there are three requirements to avoid a lien: (1) it must be a judicial lien; (2) it must be against the interest of the debtor in the property; and (3) the debtor must be able to exempt the property. Whether the lien is a judicial lien will depend on the origin of the lien. A secured creditor can lose its protected status if the lien, which was originally secured, is subsequently enforced through a state court judgment by filing a notice with a county register of deeds. See In re Underwood, 103 BR 849 (Bankr ED Mich 1989). In that event, the secured debt becomes an unsecured judicial lien which can be avoided. The bankruptcy code, however, specifically provides that this exemption does not apply to judgments from mortgage foreclosures. See 11 USC 522(f)(2)(C). If you satisfy these requirements, you may be able to avoid the lien and have a greater chance of successfully emerging from bankruptcy with more of your assets.

- Richard V. Stokan, Jr.