ELIMINATING JUDGMENT LIENS THROUGH BANKRUPTCY
A judgment lien is a type of nonconsensual lien (a lien that attaches to your property without your agreement). It is created when someone wins a lawsuit against you and then records the judgment with the Recorder of Deeds.
JUDGMENT LIENS CAN BE AVOIDED IN TOTAL OR PARTIALLYJudgment liens can be avoided (reduced to unsecured debts) to extent that it impairs the Debtor's Homestead exemption.
The avoidance is allowed in both Chapter 7 and Chapter 13.
HOMESTEAD EXEMPTIONS IN ILLINOISIllinois allows a series of exemption to an individual who files a bankruptcy. As to homes, the exemption is $15,000 for one person and $30,000 for a married couple.
The Homestead Exemption(s) can be applied when avoiding a Judgment Lien. Note: it cannot be applied when attempting to avoid an IRS lien.
AVOID THE JUDGMENT LIEN IN ITS ENTIRETYIf the balance of mortgages and possible prior liens plus the exemption exceeds the market value of the house the judgment lien can be avoided in its entirety.
An example might be as follows for a married couple the mortgage balances are $100,000 plus $30,000 homestead exemption while the market value of the house is $125,000. The judgment lien can be avoided in its entirety.
AVOID THE JUDGMENT LIEN PARTIALLYWhat if there is some small equity after deducting the exemption and all superior lines?
Assume a judgment lien in the amount of $20,000. The mortgage balance and other prior liens (such as real estate taxes) are $100,000 and the married couple's exemption is $30,000 but the market value is $134,000.
Then the judgment lien is avoided partially: the Chapter 13 must pay $4,000 in full and the balance as an unsecured debt, presumably with a very low dividend.