Judgment Liens After Bankruptcy: Are They Threatening Your Real Estate Transaction?
Did you know that a judgment “lien” against real property may survive a bankruptcy discharge? The survival of this lien may impair title to the real property and make it difficult to sell property at a short sale, or even at a non-short sale.
A judgment lien is not ordinarily released until the judgment debt has been satisfied.
When a money judgment is entered against a person by a court, two things happen: (1) a judgment debt is created, and (2) a judgment lien attaches to any real property the judgment debtor owns in that jurisdiction. A judgment creditor can also record the judgment in other jurisdictions where the debtor owns property, thus creating a lien against that property as well. A judgment lien is not ordinarily released until the judgment debt has been satisfied.
When a person files for bankruptcy, all of that person’s, or the debtor’s debts, including any judgment debts must be listed in the bankruptcy petition. If the debtor owns real property, any judgment liens must also be listed. When a discharge is entered, the underlying debt associated with the judgment is wiped out. HOWEVER, the judgment lien that attached to any real property survives unless the debtor takes steps to remove or “avoid” the lien through a motion filed with the bankruptcy court.
The debtor may not even realize the lien survived until he or she tries to sell the real property after the discharge has been entered.
Sometimes judgment liens are missed or the debtor may not understand that the lien has not been released when the debt is discharged because the necessary steps to avoid the lien in the bankruptcy were not taken. The debtor may not even realize the lien survived until he or she tries to sell the real property after the discharge has been entered. The survival of the lien against the real property creates a cloud on the title that must be removed in most circumstances if the debtor is to sell the property. Release of the lien usually requires the consent of the judgment creditor or the lien holder. Most judgment creditors will not voluntarily release a judgment lien without some payment of the judgment debt, which may not be feasible depending on the creditor’s demands and/or the availability of the debtor’s funds.
There may be times when a closing date is approaching, and the judgment creditor’s cooperation is not forthcoming, placing the transaction in jeopardy. What can the debtor/seller do if payment of this debt is not possible?
We recently assisted a seller with this very problem. Fortunately, there is a procedure in bankruptcy to remove or avoid the lien so that the sale can proceed. Here are the steps we followed:
- File a motion with the bankruptcy court to re-open the seller’s bankruptcy for the limited purpose of filing a motion to avoid the judgment lien.
- Once the case is re-opened, file a motion to avoid the judgment lien. The motion must be supported with copies of the following documents:
- deed to the real property
- an appraisal showing the value of the property at the time the original bankruptcy petition was filed
- an appraisal showing the current market value
- evidence of the balance of any mortgages when the original bankruptcy petition was filed, and
- evidence of the amount of all liens on the property, including the subject judgment lien and any deeds of trust or mortgages.
- Notice of the motion must be given to the former creditors, including the judgment lien holder, and a hearing is held before the bankruptcy court.
- If the court determines that the case meets the requirements for lien avoidance under the bankruptcy code, an order avoiding the lien will be entered.
- Record the bankruptcy order in the county land records to remove the cloud on title.
The property can then be sold free and clear of the judgment lien.
Consult a bankruptcy attorney to evaluate the facts at issue and to determine whether lien avoidance is possible.
Bear in mind that each case is different, and not all judgment liens may be avoidable. This procedure only works on judgment liens where there has been a prior bankruptcy discharge. If you have a case where there are unreleased judgment liens and the seller has previously filed for bankruptcy, consult a bankruptcy attorney to evaluate the facts at issue and to determine whether lien avoidance is possible.