Stripping liens in bankruptcy court . . . or maybe avoiding them

If you are a debtor in bankruptcy court, stripping could be a very profitable thing . . . stripping off liens from your property, that is.

But it might not be the only bankruptcy strategy to get rid of pesky liens. Avoidance could work well, too.

California bankruptcy law guru Cathy Moran has written a nice article on the niceties of the differences between the two approaches. Its a subject that often confounds even experienced bankruptcy attorneys.

Basically, the idea is that avoidance is a way to eliminate liens placed on property that the debtor has declared exempt from attachment in the bankruptcy. It works principally on judicial liens, meaning those issued by a court as the result of a lawsuit. It won’t help you get rid of tax liens, because those arise by statute, not court orders.

If you are attempting to avoid a lien, it usually is a simple matter which involves your attorney filing a motion which is rarely disputed. As long as you complete your bankruptcy case and don’t bail out early, you will end up with an order from the judge that you can record at the county registry of deeds.

Avoidance is a creation of section 522 of the bankruptcy code (concerning exeptions), and so applies equally to Chapter 7 and Chapter 13 cases.

As for the somewhat sexier topic of stripping, for years this tactic has been the exclusive province of Chapter 13 filers. With lien stripping, the trick is to find second of third liens that are completely underwater. In that case, they can be “stripped,” and the creditor gets an unsecured claim instead.

Again, this is handled by a fairly routine motion, which may or may not be contested in court.

First mortgages on residential homes cannot be stripped or modified at all, and if there is even a dollar’s worth of equity supporting a loan in second or third position, that lien can’t be stripped off either. Again, the loan must be completely underwater to get it’s lien stripped.

The big news recently in the lien-stripping world came out of Georgia, where the in the McNeal case the 11th Circuit recently ruled that Chapter 7 filers can strip liens, too.

So far, this decision only applies in Florida and Georgia, but you can be sure I’ll be watching to see if there is any enthusiasm for the reasoning behind it among Massachusetts and New Hampshire bankruptcy judges.

It certainly would be much cheaper and quicker for debtors to be able to strip liens in a Chapter 7 case. But only time will tell if that will become a realistic possibility in this corner of the nation.


By Doug Beaton

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