Bankruptcy and Liens
People often have confusion about bankruptcy and liens. Most commonly, the question comes up with bankruptcies and liens from judgments. That is, you got sued, the creditor won, they got a judgment, and then the question becomes do bankruptcies clear judgements. What is a judicial lien? And what is avoidance of a lien? And can bankruptcies avoid liens, and if so, when can bankruptcy avoid a lien? Ok that was more than one question. So let’s begin breaking this down.
What is a judicial lien?
You owed money, couldn’t pay it, and they took you to court.
As a rule, a typical bankruptcy does not get rid of liens.
If they won, they got a judgment. One of the remedies with that judgement is to get a judicial lien. So what is a judicial lien? It’s when a judgment “attaches” to property of yours. Not physically, of course. You don’t see a sign taped to your garage door that says, “lien on me.” What typically happens is if there’s a judgment against you, the creditor will go to the county assessor’s office and record a lien against not just you, but your asset. Now, both you and the house owe the debt. This is a judicial lien.
So do bankruptcies clear judgments?
A judgment is when a court has ruled you owe a debt. A lien is where the creditor has made it so that an asset or thing also owes a debt. Do bankruptcies clear judgements? Yes, they can. It depends on what you mean by “clear.” It might just be the lawyer in me coming out, but bankruptcies don’t clear judgments as in erase them from your credit report. Bankruptcy does clear judgements so that they’re discharged and you don’t owe them anymore.
So then I’ll never have to pay the judgment?
It depends. You don’t owe the debt anymore. But, if there’s a judicial lien attached to your property, it may have to. As a general rule, a typical bankruptcy does not get rid of liens. So if you have a judgments and discharge it in bankruptcy, the lien may still need to be paid.
Why should I have to pay a judicial lien years later after the judgment was discharged in a bankruptcy years earlier?
This is, unfortunately, a question that comes up. The bankruptcy discharged the debt so you don’t owe it, but if there’s a judicial lien against your house, it didn’t go anywhere unless you took steps to avoid the lien.
Did you tell your bankruptcy attorney you had a lien? More importantly, did you sign a contract and pay an additional fee for your bankruptcy for lien avoidance? Avoiding a judicial lien costs extra money and takes extra work, beyond the usual bankruptcy fees. Your bankruptcy attorney has every incentive to provide this service for you if you inform them of judicial liens and are willing to pay extra for him or her to remove them. Chances are you didn’t tell them about it because you didn’t know. Don’t blame your lawyer; we’re not mind-readers. Had we known, we’d have happily charged extra to provide an additional service that would benefit you greatly. No one knew, and it’s no one’s fault.
But I didn’t know about the judicial lien at the time I filed bankruptcy. Can I avoid it years later?
It depends. This is the typical situation. A credit card sues someone, they get a judgment, they record a judicial lien, and the debtor then files bankruptcy. They don’t know about the lien, so they don’t tell their bankruptcy lawyer about it, and don’t contract with him or her to avoid it, don’t pay extra for it, and then years later when they want to refi or sell, horrors! There it is.
The good news with bankruptcy and liens is that a judicial lien can still be avoided years later if it could have been avoided at the time of filing bankruptcy.