Taking Care of Judgment Liens in Bankruptcy

When someone is sued for a debt in court, the resulting judgment can become a lien on their real property.  Becoming a lien means two main things:  first, the creditor can actually force the sale of the house to satisfy the lien, though this almost never happens;  and second, if the house is to be sold while the judgment is still there (10 years in New York), the lien will have to be paid off to complete the sale.  These problems can usually be easily taken care of when the homeowner files for bankruptcy.

Creditor Lawsuits in New York

In New York, there are two levels of the court system where someone can be sued for a debt.  For larger debts, there is the Supreme Court or County Court.  This is where a creditor will sue when the debt is larger than  $25,000.00.  When the creditor is awarded a judgment, it automatically becomes a lien on any real property owned within the county where the suit was brought.  If the debt is less that $25,000.00, the suit will be brought in a lower court, called the Civil Court in New York City, or called the District Court in Nassau and Suffolk Counties.  In one of these lower courts, after a judgment is awarded, a certificate of the judgment, called a “transcript” has to be taken from the court to the County Clerk and filed there to become a lien.  The filing of the transcript from the Civil or District courts to the County Clerk is not always done, so a search of the records should be made first to see if the liens were actually filed.

Judgment Liens That Impair an Exemption

If there are judgment liens and they impair an exemption, they can be avoided in the bankruptcy case.  When someone files for bankruptcy, they are entitled to keep certain items of property despite having filed.  These are called exemptions.  If the debtor cannot make full use of his exemption because of the lien, the lien can be eliminated, or avoided.  In New York City, for example, a debtor is entitled to an exemption of $150,000.00 for a house.  Thus, if the equity in a house is $150,000.00 or less, any judgment lien will impair the full use of the exemption and can be avoided.  (If there is value above the exemption to pay the lien, then to the extent of that extra value, the lien cannot be avoided.)  These numbers are doubled where a couple files together and own the house together.  And, where a debtor owns only a part of the house, it is the part of the exemption attributed to the debtor that  matters.

Avoiding a Lien

The lien is avoided by bringing on a motion before the Bankruptcy Court showing that the exemption is impaired.  This is done by using am appraisal and evidence of the balance due on the mortgage or mortgages.  In almost all cases, the creditors do not object because they see the evidence in the motion.  The court grants an order which is then filed with the County Clerk, this avoids the judgment lien.

During the real estate downturn of the past several years, many people had houses that were worth less than the balance due on the mortgage, or for one reason or another, were not planning on staying in their house.  In these cases, the motion to avoid the liens may not have been brought before the court.  Then, several years later, when the value of the house rose and the debtor wanted to sell, they needed to get rid of the liens.  In this situation, the bankruptcy case can be re-opened and then the motion can be made to avoid the liens.

The ability to avoid judgment liens is a powerful tool that can be used in any bankruptcy case.  It is something that should always be considered.