Lien Avoidance in Bankruptcy
As I have written previously, a trustee can avoid and recover preferences, which are defined as transfers of money or property by the debtor to or for the benefit of a creditor on account of a pre-existing debt made at a time when the debtor is insolvent, and the transfer allows the creditor to receive more than would otherwise be entitled to from the estate had the transfer not been made. Such a transfer made within 90 days of the bankruptcy filing, or within one year if the creditor is an insider, is recoverable. No fraudulent intent is required in such cases. It is the timing and effect of the transfer that is the controlling factor. Typically, a trustee will send a letter demanding repayment of the preference before filing a lawsuit. Trustees will usually settle the preference claim to avoid the cost of litigation.
Because of the trustee’s ability to avoid liens obtained within ninety days of a bankruptcy filing as preferences, creditors obtaining judgments against debtors who are perceived as likely to file bankruptcy often record their judgments and wait ninety days before taking any action to collect. By doing so, their lien cannot be avoided by the trustee and will survive discharge unless otherwise avoided.
In addition to the trustee’s ability to avoid liens imposed during the ninety days prior to the bankruptcy filing as preferences, the debtor can avoid judicial liens that impair the homestead exemption. If a creditor obtains and records a judgment to obtain a judicial lien against the debtor’s homestead, that lien can be avoided to the extent it impairs the homestead exemption. This must be done while the case is open. This is often overlooked by a debtor’s counsel until years later when the debtors try to sell or refinance their home. The case can often be reopened to avoid the lien after the fact.