Avoiding Judicial Liens in Bankruptcy
This guide explains the requirements for avoiding a judicial lien on one's residence in a Massachusetts Chapter 7 Bankruptcy Case.
What is a Judicial Lien?A judicial lien is a lien on property (often on one's home, but can attach to other property as well) obtained by a creditor following a judgment against the property owner being entered by a local Court. The "Execution" is recorded in the local registry of deeds creating a lien on the propety. The lien remains on the property until it is either sold or refinanced and is paid with the proceeds from the property. The lien accrues interest at a rate of 12% a year until it is paid. A judicial lien is subordinate to a Massachusetts Homestead Declaration, if the Homestead is recorded prior to the recording of the lien.
Is a Judicial Lien Discharged in Bankruptcy Proceedings?Not necessarily and not automatically. A judicial lien may be avoided in a bankruptcy if certain conditions are met. Where the sum of the lien, all other liens on the property (such as a mortgage or tax lien) and the amount that could be claimed as exempt exceeds the value of the Debtors's interest in the property, the lien may be avoided. Even if these conditions are met, the lien will not be avoided unless the Debtor files a motion to avoid the lien setting forth all of the criteria necessary and the motion is approved by the bankruptcy court. In addition to the motion, the Debtor must attach evidence of the property's value (such as a broker price opinion, comparative market analysis or recent appraisal report) to prove that the liens and exemption in fact exceed the value of the property.
Do You Need to Have Equity in the Property to Avoid the Judicial Lien?No. Even if the value of the home is less than the amount of the first mortgage on the property, the judicial lien can still be avoided. You must claim an exemption in the property in order to avoid the lien even if there is no equity in the property. For instance, if a home worth $200,000 has a first mortgage of $250,000, you wouldn't have any equity to claim as exempt. However, in order to avoid the lien, your exemption must be impaired by the lien. So you need to claim an exemption, even if it is only for $1, before the lien can be said to "impair" the available exemption. In Massachusetts, debtors are allowed to choose between the Federal exemptions in section 522 of the Bannkruptcy Code or the exemptions permitted under Massachusetts law. Each of these exemption schemes allow for a homestead exemption, although in different amounts, and either can be used in moving to avoid a judicial lien.
After the Motion is Approved, Do I Need to do Anything More?A motion to avoid a judicial lien should always include a proposed form of order for the judge to sign. You should ensure that the order discloses the name of the lien holder, the amount of the lien and the book and page number in the registry where it was recorded. You will then need to get a certified copy of the order from the bankruptcy court and record it in the local registry of deeds. This will clear the lien from the property's title, allowing you to sell or refinance in the future, without having to pay off the judicial lien.