What Is Lien Avoidance in Bankruptcy and How Does It Work?

Do you have a court judgment hanging over your home? Maybe a creditor sued you, won, and now there is a lien on your property. You might worry that this lien will follow you forever, even if you file bankruptcy.

Here is some good news. In many cases, bankruptcy can wipe out that lien completely. This is called lien avoidance. It is one of the most powerful tools bankruptcy offers, and a lot of people do not even know it exists.

In this article, we will explain what lien avoidance in bankruptcy is, how it works, and how it may help you protect your home and your property in North Carolina.

The Short Answer

Lien avoidance is a legal step that lets you remove certain liens from your property in bankruptcy. The most common example is a judgment lien that a creditor placed on your home after winning a lawsuit.

If that lien cuts into property you are allowed to protect, the bankruptcy court can erase the lien. This means the debt gets wiped out and the lien no longer sticks to your house. Not every lien can be removed this way, but for many people, it makes a real difference.

What Is a Lien, Exactly?

A lien is a legal claim against your property. It gives a creditor a way to collect what you owe by attaching to something you own.

There are different kinds of liens. Here are the most common ones:

• Judgment liens. These come from a lawsuit. A creditor sues you, wins, and records the judgment. In North Carolina, that judgment can become a lien on your real estate.
• Mortgage liens. These come from your home loan. You agreed to the lien when you bought or refinanced the house.
• Tax liens. These come from unpaid taxes owed to the IRS or the state.
• Car loan liens. These attach to your vehicle until the loan is paid.

Lien avoidance mostly deals with judgment liens. These are the liens that often surprise people. You may not even know one exists until you try to sell or refinance your home.

How Does Lien Avoidance Work?

Bankruptcy law gives you the right to remove certain liens that interfere with your exemptions. An exemption is property the law lets you keep, even in bankruptcy.

The rule comes from Section 522(f) of the Bankruptcy Code. In plain English, it says this: if a judgment lien eats into property you are allowed to protect, you can ask the court to wipe out that lien.

Here is the basic idea.

When you file bankruptcy, you list the property you own. You also claim your exemptions. If a judgment lien attaches to property that your exemptions cover, the lien "impairs" your exemption. When that happens, the court can avoid, or remove, the lien.

This is not automatic. Your bankruptcy attorney usually files a motion asking the court to avoid the lien. Once the court grants it, the lien is gone for good.

A Simple Example

Let's say your home is worth $200,000. You owe $180,000 on your mortgage. That leaves $20,000 in equity.

In North Carolina, you can protect up to $35,000 of home equity with the homestead exemption. So all $20,000 of your equity is protected.

Now imagine a credit card company sued you and put a $10,000 judgment lien on your home. That lien cuts into equity you are allowed to protect. In this situation, you can likely avoid the lien through bankruptcy. The lien disappears, and your home stays protected.

Which Liens Can Be Avoided?

Not every lien can be removed. Lien avoidance under Section 522(f) usually applies to two types:

1. Judicial liens. These are judgment liens from lawsuits. This is the most common one we help people with.
2. Certain non-purchase-money liens on household goods. For example, a lien on your furniture or appliances that you did not use to actually buy those items.

Some liens generally cannot be removed through lien avoidance:

• Mortgage liens on your home (though Chapter 13 has separate rules for some second mortgages)
• Most tax liens
• Car loan liens
• Liens you agreed to when buying the item

If you are not sure which kind of lien you have, an attorney can review your situation and explain your options.

North Carolina Exemptions and Lien Avoidance

Lien avoidance is tied closely to bankruptcy exemptions in North Carolina. Your exemptions decide how much property you can protect, which decides how much of a lien you can remove.

North Carolina is what we call an "opt-out" state. This means you must use North Carolina's exemptions. You cannot use the federal exemption list. North Carolina's exemption rules are found in N.C. Gen. Stat. § 1C-1601.

Here are some key North Carolina exemptions that matter for lien avoidance:

• Homestead exemption. Up to $35,000 in home equity. If you are 65 or older and meet certain rules, it can go up to $60,000.
• Motor vehicle. Up to $3,500 in one car.
• Household goods. Up to $5,000, plus more for dependents.
• Wildcard and tools of trade. Up to $2,000 for work tools and certain items.

North Carolina courts are supposed to read these exemptions in a way that favors you, the debtor. That can help when you are trying to protect property and remove a lien.

One important note for married couples. If you own your home jointly with your spouse as "tenants by the entirety," lien stripping can get complicated, especially if only one spouse files. This is a detail worth reviewing carefully with an attorney.

Lien Avoidance in Chapter 7 vs. Chapter 13

You can avoid judgment liens in both Chapter 7 and Chapter 13. The process is similar, but there are some differences.

To learn more about each option, you can read about Chapter 7 bankruptcy and Chapter 13 bankruptcy. You may also find our guide on Chapter 7 vs. Chapter 13 helpful.

What If My Bankruptcy Case Is Already Closed?

This happens more often than you might think. Some people finish their bankruptcy and later realize a judgment lien was never removed.

The good news is that you can usually reopen your closed Chapter 7 case to file a lien avoidance motion. Courts in North Carolina have allowed this because removing a lien counts as a good reason to reopen.

But there is a catch. If you wait too long, the creditor may argue you delayed without a good reason. In one North Carolina case, a debtor waited nearly four years to reopen. The court allowed it but made the debtor pay some of the creditor's costs for the delay.

The lesson is simple. If you think a lien was missed, act sooner rather than later.

What Should You Do Next?

If you are dealing with a judgment lien, here are some calm, practical steps to take:

1. Find out what liens are on your property. A title search or a check of county records can show recorded judgment liens.
2. Gather your documents. Note what you owe, what your property is worth, and how much equity you have.
3. Figure out your exemptions. This decides how much of a lien you may be able to remove.
4. Talk to a bankruptcy attorney. Lien avoidance has specific rules and deadlines. A small mistake can cost you.

If a creditor has already sued you or is threatening to garnish your wages, you can also learn about how bankruptcy can stop wage garnishment and stop foreclosure.

Not sure if bankruptcy is right for you? Our guide on whether you need bankruptcy is a good place to start.

Talk to Duncan Law About Removing a Lien

If you have a judgment lien on your home, you do not have to figure this out alone. Removing a lien in bankruptcy can protect your equity and give you a real fresh start. Duncan Law can review your situation and help you decide whether Chapter 7 or Chapter 13 makes more sense for you.

You can book a free consultation online, or call the office closest to you:

• Greensboro: (336) 856-1234
• Charlotte: (704) 563-1224
• Winston-Salem: (336) 245-4294
• Asheville: (828) 348-5252
• High Point: (336) 294-5800
• Salisbury: (704) 297-4000

Duncan Law proudly serves clients throughout North Carolina. You can also contact us with your questions any time.