Description.lien avoidance is a procedure by which you ask the bankruptcy court to “avoid” (eliminate or reduce) liens on your exempt property.
how much of a lien can be avoided depends on the value of the property and the amount of the exemption.
if the property is entirely exempt or is worth less than the legal exemption limit, the court will eliminate the entire lien and you’ll get to keep the property without paying anything. if the property is worth more than the exemption limit, the lien will be reduced to the difference between the exemption limit and either the property’s value or the amount of the debt, whichever is less. (11 u.s.C. § 522(f)(2).)
ExAMPLE: a creditor has a $500 lien on harold’s guitar, which is worth $300. in harold’s state, the guitar is exempt only to $200. he could get the lien reduced to $100. the other $400 of the lien is eliminated (avoided).
$500lien $300 = value of item –$200 = exemption amount
$100 = amount of lien remaining after lien avoidance
Advantages. lien avoidance costs nothing, involves only a moderate amount of paperwork, and allows you to keep property without paying anything. it is the best and most powerful tool for getting rid of liens.
Disadvantages. some paperwork is involved. also, by trying to avoid a lien on exempt property, you may
reopen the issue of whether the property is exempt in the first place. this may happen if the property was deemed exempt by default (that is, the property is exempt because the trustee and creditors failed to timely challenge the debtor’s claim of exemption).
some courts have allowed creditors to raise the issue of the property’s exempt status at a hearing on a motion to avoid a lien. other courts have ruled that creditors cannot raise this issue—the property is deemed exempt and the only issue to discuss at the hearing is whether the lien may be avoided.
as a practical matter, motions to avoid a lien are usually not contested.
Restrictions. lien avoidance has several important restrictions, as follows.
Security Interests
a security interest (a secured debt you agree to) can be avoided only if it meets the criteria listed below.
• the lien must be the result of a loan that you obtained by pledging property you already own as collateral. this is called a “nonpossessory, nonpurchase-money security interest.”
that sounds complicated, but it makes sense when you break it down:
■ nonpossessory means the creditor does not physically keep the collateral you’ve pledged as collateral. you keep it in your possession;
the creditor only retains a lien on it. (in contrast, if you leave your property at a pawn shop to get a loan, that is a possessory security interest—for which this lien avoidance procedure is not available.)
■ nonpurchase-money means that the money loaned was not the money used to purchase the collateral.
■ security interest means the lien was created by a voluntary agreement between you and the creditor.
the most common examples of nonpossessory, nonpurchase-money security interests are home equity loans and personal loans for which a car is pledged as collateral. unfortunately, as explained below, these two most common types of collateral are not included in the list of property for which you can use this remedy. Consequently, the
situations in which you can use this procedure, as a practical matter, are quite limited.
• the property you pledged must be exempt under the exemption you are using. (remember that domicile requirements may limit the exemptions available to you—see Ch. 3 for more information.)
• the collateral you pledged must be one of the following:
■ household furnishings, household goods, clothing, appliances, books, and musical instruments or jewelry that are primarily for your personal, family, or household use
■ health aids professionally prescribed for you or a dependent
■ animals or crops held primarily for your personal, family or household use—but only the first $5,575 of the lien can be avoided, or
■ implements, professional books, or tools used in a trade (yours or a dependent’s)—but only the first $5,575 of the lien can be avoided.
a security interest cannot be removed from real estate or from a motor vehicle unless the vehicle is a tool of your trade. generally, a motor vehicle is not considered a tool of trade unless you use it as an integral part of your business—for example, if you do door- to-door sales or delivery work. it is not considered a tool of trade if you simply use it to get to and from your workplace, even if you have no other means of commuting.
What Are Household Goods?
Under the new bankruptcy law, household goods are limited to:
• clothing
• furniture
• appliances
• one radio
• one television
• one VCR
• linens
• china
• crockery
• kitchenware
• educational equipment and materials primarily for the use of your minor dependent children
• medical equipment and supplies
• furniture exclusively for the use of your minor children, or your elderly or disabled dependents
• your personal effects (including your wedding rings and the toys and hobby equipment of your minor dependent children) and those of your dependents, and
• one personal computer and related equipment.
Items in the following categories are not consid- ered to be household goods and you cannot avoid liens on them:
• works of art (unless they were created by you or a relative)
• electronic entertainment equipment with a fair market value of more than $550 total (not including the one television, one radio, and one VCR listed above)
• items acquired as antiques that have a fair market value of more than $550 total
• jewelry (other than wedding rings) that has a fair market value of more than $550 total, and
• a computer (excluding the personal computer and related equipment listed above), motor vehicle (including a tractor or lawn tractor), boat, motorized recreational device, convey- ance vehicle, watercraft, or aircraft.
CHAPTER 5: SECURED DEBTS 93
Nonconsensual Liens
a nonconsensual lien (a secured debt you didn’t agree to) can be avoided only if it meets two criteria:
• the lien must be a judicial lien, which can be removed from any exempt property, including real estate and cars. (see Ch.3.)
• you must be able to claim the property as exempt.
When to use it. use lien avoidance whenever possible, especially if a lien can be completely wiped out. even if you don’t need the property, you can avoid the lien, sell the property, and use the money for things you do need.
to keep things simple, you may want to avoid liens only on property that is completely exempt. then the lien will be eliminated entirely and you’ll own the property free and clear, without paying anything to the creditor.
even partial lien avoidance can be beneficial, but sooner or later you’ll have to pay the remaining amount of the lien to the creditor if the property has a title document or is subject to repossession or foreclosure on what’s left of the lien. Most often, you’ll have to pay off the lien in a lump sum, but some creditors may be willing to accept installments, especially if you compromise on the value of the lien.
How it works. you request lien avoidance by checking the column “Property is claimed as exempt” on the statement of intention and typing and filing a motion.
(Complete instructions for preparing and filing a motion to avoid a lien are at the end of this chapter.) although it may sound complicated, lien avoidance is usually a routine procedure that involves just a little time.
Eliminating Judicial Liens on Oversecured Property To determine whether you can eliminate a judicial lien,
apply this simple formula. Add the following items:
• all consensual liens on the property (for example, a mortgage and home equity loan)
• all tax liens, and
• your exemption amount.
If the total of all these items is greater than the value of the property, then you can completely eliminate judicial liens on the property. The Judicial Lien Work- sheet, below, will help you do the math.
Here are a few sample calculations:
ExAMPLE A ExAMPLE B ExAMPLE C
Value of property ... $200,000 Value of property ... $200,000 Value of property ...$200,000 Mortgage ... 100,000 Mortgage ... 150,000 Mortgage ...160,000 Second mortgage ... 20,000 Second mortgage ... 20,000 Second mortgage ...40,000 Exemption ... 10,000 Exemption ... 10,000 Exemption ...10,000 TOTAL ... 130,000 TOTAL ... 180,000 TOTAL ...210,000 Amount available for
judicial liens ... 70,000
Amount available for
judicial liens ... 20,000
Amount available for
judicial liens ...0 Amount of judicial lien ... 30,000 Amount of judicial lien ... 30,000 Amount of judicial lien ...30,000 RESULT: Lien cannot be eliminated RESULT: $10,000 of lien can be
eliminated, $20,000 of lien cannot be eliminated
RESULT: Judicial lien can be completely eliminated
One more point to remember: For the purposes of bankruptcy’s lien avoidance provisions, judicial liens get the lowest priority, behind consensual liens and tax liens, regardless of when the liens were placed on
the property and regardless of what state law says. So, in Example C above, it would not matter if the $30,000 judgment lien was created before or after the $40,000 second mortgage: The judicial lien can be eliminated either way.