Judgment liens on your property
Updated: Jul 30, 2020
Although the granting of the discharge in a bankruptcy case may wipe out your personal liability for a judgment, and the creditor would not be able to garnish wages or levy a bank account after the filing and discharge, if the creditor recorded an Abstract of Judgment in a county where you own real estate, that judgment becomes a lien on your property which remains after the discharge unless that lien is avoided by court order.
Unless the creditor agrees to voluntarily release the lien, a motion needs to be filed with the Bankruptcy Court in which you would need to prove that the judgment lien impairs the exemption to which you are entitled. So for example, your home is worth $600,000, you owe $525,000 in mortgage debt, and have a judgment lien of $40,000 and you are a single person who claims a $75,000 exemption, since there is no equity in the property in excess of the $75,000 to which you are entitled, the judgment lien can be avoided in its entirety. However, if the property has a value of $610,000, there would be $85,000 equity in the property. You would be entitled to your $75,000 exemption and the judgment lien would be reduced to $10,000.
This calculation will be slightly different than the one used to determine whether the Trustee will take any interest in and seek to sell the property. For that calculation, 8% cost of sale are generally deducted as that is what would have to be paid, in addition to the mortgages, if the Trustee were to actually sell the property.
Often debtors are not aware of the judgment lien until years later when they attempt to refinance or sell the property and the lien can still be avoided at that time. A motion reopening the closed case will need to be filed and once the case is reopened, the Motion to Avoid Lien can be filed. In the case of Culver, LLC v. Chiu (In re Chiu), 304 F.3d 905 (9th Cir. 2002), in which Heston & Heston represented debtors who had filed a Chapter 7 bankruptcy case several years previously. My clients were able to avoid the judgment lien and although by then the property had appreciated substantially since the case was filed, the Ninth Circuit Court of Appeal held that it is the value of the property at the time of the filing of the bankruptcy that is determinative, not the value at the time the motion is made. Additionally, the Chius were able to avoid the judgment lien notwithstanding the fact that escrow had closed for the sale of their home (although a portion of the proceeds were held in escrow pending the Bankruptcy Court determination).
In order to avoid the lien, you will generally need an appraisal of the property as of the date of the filing of the petition or a date close thereto and copies of mortgage documents and statements near the time of the filing of the petition showing the principal balance owing.