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One of the most effective weapons in the bankruptcy toolbox for getting a real new start in bankruptcy is the debtor’s ability to avoid certain liens on his assets. Liens generally move through bankruptcy undisturbed by the discharge, according to the usual norm.
Only the debtor’s personal obligation is discharged in bankruptcy. If the debtor owns any property, it continues to be subject to any liens that may still be in place against it. The creditor with the lien can still pursue the property after the bankruptcy, but they are unable to use the discharge to recover any deficiency from the debtor.
Exemption-impairing liens
Liens that attach to property that the debtor claims seem to be exempted. They may be avoided to the degree that doing so reduces the value of the exemptions. In both Chapter 13 and Chapter 7, lien avoidance is an option.
What is excluded?
It is possible to prevent two separate types of liens from undermining exemptions. A judicial lien such as a garnishment or judgement, or a non-possessive, non-purchase money security interest in furniture or equipment.
Even if they affect exemptions, tax liens (which are statutory liens rather than judicial liens) cannot be discharged under Chapter 7 bankruptcy; however, they may be discharged in Chapter 13 bankruptcy to the extent that the lien exceeds the asset’s worth.
Is the lien a security interest that is neither possessory nor secured by a purchase price?
This awkward term represents the normal finance firm lien, in which the borrower promises to the lender his belongings, including furniture, appliances, jewellery, etc. Such foreclosures are obtained by the lender because the possibility of losing such assets terrorises debtors rather than because those items are valuable enough to pay back the loan. These liens can be avoided if they are placed on items like furniture, clothes, jewellery, household pets, musical instruments, tools of the trade, or medical devices that have been recommended by a doctor.
Required steps to avoid a lien
To remove a lien, a borrower must serve the creditor whose lien is to be removed and file a motion outlining all the legal requirements that allow him to do so. Some legal systems demand a hearing. If the affected creditor fails to object in a timely manner, others will be able to avoid the lien.
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Preventing the forced transfer of exempt property
The bankruptcy legislation goes beyond just guaranteeing the debtor’s right to exempt property and permits the debtor to reclaim property that a creditor has taken control of prior to the bankruptcy being filed.
In order to reclaim the property, the debtor may file a lawsuit in the bankruptcy court if the garnishment prevented the debtor from claiming it as exempt and the transfer occurred within 90 days of the bankruptcy filing.