Through bankruptcy you may be able to remove a lien on your personal property. This short article is not intended to serve as a DIY guide, but is merely given to illustrate how bankruptcy can reduce the burden of debt.
High Interest Store Front Lenders
A common practice with certain lenders is to require their customers to list things such as televisions, gaming systems, computers, and tools when obtaining a loan. The loan documents will contain language that grants the lender a security interest in those items. By granting a security interest in household goods the lender can repossess the property if you fail to pay.
While the enforceability of these agreements that do not specifically identify the property in which they claim to hold the security interest in is highly questionable, most people do not have the financial ability to fight them. It is all too common for the lender to threaten repossession in order to strong arm payment. No one wants their child's gaming system or television to be taken from them. You may be able to beat them though.
USING THE LIEN STRIPPING POWERS OF 11 USC 522(f)
There is a provision of the Bankruptcy law that can help people faced with these extremely high interest "secured" debts. Unfortunately, it is probably an under used tool in the attorney's arsenal of weapons to protect the honest Debtor. Whether the failure to use it stems from the fact that bankruptcy attorneys do not realize its power, or because low cost, high volume bankruptcy attorneys do not want to take the time to do the work necessary to fully represent their clients, many people complete their bankruptcy only to find that they are still hounded to pay a debt in order to keep their property.
The weapon is found buried deep in the Bankruptcy Code at 11 USC section 522(f). It is available for both people who file Chapter 7 and Chapter 13. In essence, the law provides that you can avoid a non-possessory, non-purchase money security interest in household goods or tools of the trade to the extent that the security interest impairs an exemption. In the bankruptcy world, we refer to it as "lien stripping."
Let's break down the legalese.
NON-POSSESSORY SECURITY INTEREST - WHAT IS IT?
Section 522(f) requites that the security interest must be non-possessory. This merely means that the lender did not keep your property in its possession until the debt is paid.
For instance, you take your laptop to a pawn shop and they loan you $50.00 and keep your laptop until it is paid. In that case this law will not benefit you because the lender is in possession of the item. On the other hand, you go to another lender and they merely write on the loan documents that you give them a security interest in your laptop and they let you keep the laptop in your possession. The security interest is then non-possessory so you have cleared the first hurdle in stripping the lien.
NON-PURCHASE MONEY SECURITY INTEREST - WHAT IS IT?
The second element of 522(f) requires that the security interest must be a non-purchase money security interest. This is merely legalese to identify whether you used the loan proceeds to purchase the property in question.
Let's say that you go to Best Buy and buy a new laptop and charge it on your Best Buy card. Likely, there is language in the credit agreement that grants a security interest in the laptop. Because you incurred the debt to buy the laptop it is considered a purchase money security interest and you cannot use section 522(f) to strip the lien.
Back to the store front, high interest, lender. You already own the laptop and they loan you $500.00 and write in the loan documents that they have a security interest in it. Because you did not use the loan to purchase the laptop it is a non-purchase money security interest. Assuming that they have let you keep the laptop in your possession, you have now cleared the second hurdle to stripping the lien.
IMPAIRS AN EXEMPTION - WHAT IS IT?
Next, the lien must impair your exemptions in that property. When you file bankruptcy everything you own is considered part of the "bankruptcy estate." Your bankruptcy attorney will apply exemptions so that your property is not used to pay your debts. While bankruptcy is a federal law, the use of exemptions is considered at the state level and can get quite complex. The idea is that you need to be able to keep certain property so that you can obtain a fresh start through bankruptcy.
Going back to the laptop. In Missouri, a couple has $6,000.00 in exemptions in household items such as furniture, clothing, books, and appliances. Let's say that you could sell all of these items for $4,000.00, including the laptop. The good news it that because your exemption amount is greater than the value of your household items you get to keep them. The even better news it that because the security interest for the $500.00 loan would keep you from using your full $6,000.00 exemption you could complete strip the lien meaning that the debt is an unsecured debt, just like a medical bill or most credit cards.
WHAT CAN I USE THIS FOR?
This specific tool is strictly designed for protecting household goods. You can use it to eliminate or reduce the lien on things such as televisions, gaming systems, computers, furniture, lawn equipment, tools and musical instruments.
The law does not apply to cars and other motor vehicles though. All is not lost because there is another section of the bankruptcy laws that may help you with your upside down car loan. Depending on your situation, you may be able to use a Chapter 13 bankruptcy to strip the lien on your car.
What about my house? Another part of section 522(f) might allow you to strip a lien on your house if the lien was created by a Court Judgment. Many times when a creditor takes you to Court and obtains a Judgment a lien is placed on your house. Depending on the value of your house and your available exemptions, you may be able to make all or part of the Judgment an unsecured debt and eliminate it completely through bankruptcy.
11 USC section 522(f) is a powerful tool that can weld great results in your bankruptcy. Talk you your bankruptcy attorney about whether it can help you.
This article is not designed to constitute legal advice and is merely a brief overview of the possibilities available through bankruptcy. The actual nuts and bolts of lien stripping requires thorough knowledge of bankruptcy. Please consult a knowledgeable and experienced bankruptcy attorney.
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