What is a Judicial Lien and How Can You Avoid One?

A lien is an interest that a creditor acquires in property that allows the creditor to take the property upon the occurrence of certain conditions.

What is a Judicial Lien?

Let’s start with a basic lien. A lien is an interest that a creditor acquires in property that allows the creditor to take the property upon the occurrence of certain conditions.

In the case of a security interest, or a lien on personal property, the creditor can usually use “self-help” remedies and pick up the property, if the debtor does not make payments. With regard to real estate, a court order will often be needed to enforce a lien. Liens are common in real estate transactions and usually arise in express contracts between the debtor and creditor. Such a lien is called a mortgage lien. The contract provides for the creditor to take the property, through a judicial foreclosure action, if the debtor fails to follow the contract.

There is another kind of lien on real estate called a judgment lien or judicial lien.

What’s the Difference Between a Statutory and Judicial Lien?

In addition to being part of a contractual agreement liens can also be judicial. A judicial lien is created by legal proceedings, such as a judgment, levy or sequestration and arises from an order from the court. If the court determines that the debtor owes money to a creditor, the court can issue a judgment, which becomes a judicial lien on all real estate owned by the debtor in the county in which the judgment is filed. The creditor can then foreclose the judgment lien and have the property sold at auction and give the proceeds to the creditor.

A statutory lien is an interest in property that arises through the operation of law without requiring consent by either party. Statutory liens arise out of transactions between parties. A good example is the “mechanic’s lien,” commonly called a construction lien. A mechanic’s lien is an interest in property for the benefit of those who have worked on the property. In this example, the mechanic possesses an interest and they can hold on to your car until you pay them for their work.

What is Lien Avoidance?

Lien avoidance is a powerful tool in Chapter 7 Bankruptcy that allows a lien against a property to be discharged by a bankruptcy court. Lien avoidance lifts the lien on the property and, if there are no other encumbrances on the property, gives the owners clear title. However, only certain types of liens qualify for lien avoidance. In general statutory liens are not avoidable but judicial liens are, but only to the extent that they encumber an exemption that the debtor is otherwise entitled to. The following New Mexico Bankruptcy Court case demonstrates this type of lien avoidance.

In Re Morgan: A Case Study in Lien Avoidance

In this 2009 opinion written by Judge Jacobvitz the debtors filed for Chapter 7 bankruptcy. At the time of filing the debtors owned two parcels of land with a combined value of $180,000. The debtors also had about $45,000 in exemptions under Bankruptcy Code section 522(d) as well as a handful of liens against the property. Two of the liens were statutory: the IRS had a lien for $142,000 and the New Mexico Taxation and Revenue Department had a lien of $34,000. In addition to these statutory liens, the property was encumbered by a number of judicial liens that totaled about $38,000.

The court addresses the issue of how to determine if the liens impair a debtor’s exemption by turning to the formula found at Bankruptcy Code section 522(f)(2)(A) which provides that the lien impairs the exemptions if the sum of all the liens on the property and the amount of the exemption that the debtor could claim if there were no liens on the property exceed the value that the debtor would have if the property was not encumbered with any liens. For example, if the liens all together are $10,000 and the owner could claim $5,000 in exemptions (for a total of $15,000 under the test) but the property would only be worth $12,000 if there were no liens, then the lien would impair the exceptions and would be eligible for lien avoidance.

In the present case the Court determines that the IRS and State tax liens must be included in the exemption calculation. Including these liens puts the total dollar amount in liens against the property significantly higher than the value of the property. Therefore the judicial liens, which are the only liens subject to avoidance, can be lifted from the property.

How Lien Avoidance Can Help You

Lien avoidance can help you avoid a large chunk of debt in the event of filing for bankruptcy. It can also work towards clearing title on property allowing the property to be sold to pay other debts. However, lien avoidance can be very complex and only works in certain circumstances.

To find out if encumbrances on your property are eligible for lien avoidance contact the attorneys at Albuquerque Business Law. Our bankruptcy experts can help you manage your assets, preserving your property during the bankruptcy process. Call or click today with any questions you have about lien avoidance.

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