This is the second post in a three-part series by Charleston Bankruptcy Lawyer, Russell A. DeMott. Russ also practices real estate law, and has shared his knowledge of how the Bankruptcy Code can be used to strip judgment liens from real estate.
In “Lien Avoidance (Part One),” I introduced the concept of liens. In this post, I’ll explain how a particular type of lien called a “judicial lien” works.
A judicial lien results from a creditor obtaining a judgment against you and recording that judgment in the county in which you live.
For example, if you default on your Master Card payments, the card issuer will eventually sue you. Assuming you have no defense—you just stopped paying and the creditor hasn’t waited too long to sue you—the creditor will obtain a judgment against you. Once that judgment is recorded in the county in which you own property, it’s a—you guessed it—a lien on your property. We call judgment liens “judicial liens” because they arise out of the judicial process through court cases.
Why is This a Problem?
I discussed the obvious problem in Part One—that the judgment lien creditor can take your house. But that’s not always the real problem. Let me give you an example. If you have a home worth $200,000 and you have a first mortgage on the property for $150,000 and a second mortgage (like a home equity loan) for $35,000, there’s $15,000 of equity. That’s what the judicial lien creditor is after, right? But the judicial lien creditor won’t try to take the property—called “levying execution.” Why? The judicial lien creditor is third in line behind two other creditors. In this example it’s the first and second mortgage. With so little equity, the judicial lien creditor is probably out of luck. If the creditor were to force a sale of the property, the first and second mortgage holders would get paid first, leaving virtually nothing for the judicial lien creditor. This is because the property would not be sold for its fair market value of $200,000. Instead, it would likely be impossible for the judicial lien creditor to get enough to pay off the first and second mortgages.
So I’m Protected as Long as I Don’t Have Much Equity?
Not exactly. There are two things which need to concern you. First, in New Mexico, judicial liens are valid for fourteen years. So while you don’t have equity now, you may ten years from now.
Second, there’s another practical set of problems. The judicial lien renders your property unmarketable. It’s what real estate lawyers call a “cloud on title.” You must pay it off in order to pass marketable title to someone who wants to buy your property. In our example, with the judicial lien on your $15,000 of equity, it would be impossible to sell your property without paying off the lien. There’s no equity left for costs of sale like realtors’ commissions, deed stamps, and property taxes. And even if you don’t want to sell the property, you might want to refinance it some day.
Here’s Where the Bankruptcy Code Comes to the Rescue
Remember from Part One how “liens survive bankruptcy?” Well, there’s an important exception. The Bankruptcy Code provides that, to the extent the judicial lien impairs your exemption in your property; you may “avoid” the lien. Exempt property is property which, by law, you are allowed to keep.
For example, if you have a home worth $200,000 and a mortgage for $170,000, you have $30,000 in equity. In New Mexico you can exempt—retain— $60,000 in equity in your home ($120,000 for married debtors). If your credit card company sues you and gets a judgment against you for $20,000, that judicial lien “impairs” your exemption. It’s eating up that $30,000 worth of equity. Because of this impairment, you can file a motion to “avoid” the lien on your home. The court will then enter an order providing that the lien is avoided. The result is you avoid all of the problems discussed above. Your property is no longer saddled with the judicial lien.
Make Sure You Tell Your Bankruptcy Lawyer About Any Judgments Against You
Be sure to tell your lawyer if you have judgments against you. She can’t do anything to avoid these judicial liens unless she knows about them. Bankruptcy lawyers aren’t going to do a title search on your property as part of your bankruptcy case unless they first know of a problem. And it’s up to you to tell them.
In “Liens in Bankruptcy (Part Three),” I’ll discuss another kind of liens, liens on your household goods.