Our clients from all over the Orange County area, including those from communities such as Goshen, Monroe and Warwick, are frequently confused about the effect that a Chapter 7 Discharge has on judgments that have been entered against them, especially if the judgments are liens on their residence.
A money “judgment” is a court determination that makes the debtor personally liable for the payment of a debt. Things are fairly simple in bankruptcy when the debtor does not own any real estate, since the judgment is unsecured and is not a lien on anything. The obligation to pay the judgment is eliminated once the bankruptcy Discharge is entered, and the judgment becomes just an unpleasant memory for the debtor.
Things are not quite as simple, though, when the judgment debtor owns real estate. A “lien” is a claim or encumbrance on certain property (such as real estate) to secure payment of a debt. Mortgages and car loans are common examples of liens, and such liens generally survive a bankruptcy Discharge. Another type of lien is a “judicial lien”. A “judicial lien” on real estate is created when a judgment (or transcript of judgment) is recorded in the County Clerk’s Office of a county where the debtor owns real estate. A judicial lien encumbers not only real estate owned by the debtor at the time of the judgment, but also any real estate acquired thereafter, and it can be enforced against such real estate for a period of ten (10) years after the date of the original entry of the judgment. Like mortgages and car loans, a judicial lien that is not “avoided” in the bankruptcy case will survive the bankruptcy Discharge, which can be quite an unpleasant surprise for the uninformed debtor.
The good news is that in certain cases a lien avoidance motion can be made in Bankruptcy Court under Code section 522 (f)(1)(A) to remove the judicial lien encumbering debtor’s real estate. The determining factor is whether the debtor could have exempted some or all of the equity in the real estate had the judicial lien not been present. A judicial lien can be avoided to the extent that it impairs a debtor’s ability to claim either the full homestead exemption or the full wild card exemption. The statutory language explaining the relevant calculation is rather cryptic, but basically, to the extent that the equity (FMV of the real estate minus all senior liens, such as mortgages) in the real estate is less than the exemption claimed by the debtor, the judicial lien can be avoided, either in whole or in part. This concept is better demonstrated by the three (3) examples set forth below, each of which assumes the following facts:
If the mortgage encumbering debtor’s residence is $200,000.00, the $100,000.00 judicial lien can be completely avoided. Since there is only $75,000.00 equity ($275,000.00 FMV minus $200,000.00 senior lien) in the residence, said $75,000.00 equity is fully protected by the $125,000.00 homestead exemption. Any judicial lien trying to attach to said equity would impair debtor’s ability to claim the full homestead exemption.
If the mortgage encumbering debtor’s residence is $20,000.00, the $100,000.00 judicial lien cannot be avoided at all. Since there is $255,000.00 equity ($275,000.00 FMV minus $20,000.00 senior lien) in the residence, the $125,000.00 homestead exemption does not protect $130,000.00 ($255,000.00 minus $125,000.00) of the available equity, allowing the $100,000.00 judicial lien to fully attach to said equity
If the mortgage encumbering debtor’s residence is $110,000.00, the $100,000.00 judicial lien can be partially avoided. Since there is $165,000.00 equity ($275,000.00 FMV minus $110,000.00 senior lien) in the residence, the $125,000.00 homestead exemption does not protect $40,000.00 ($165,000.00 minus $125,000.00) of the available equity, allowing the $100,000.00 judicial lien to attach to said $40,000.00 of non-exempt equity. Accordingly, the $100,000.00 judicial lien can be avoided only to the extent of $60,000.00. The remaining $40,000.00 is not avoided.
Judicial liens encumbering real estate other than debtor’s residence (ie., vacant land, investment property, etc.) can also be avoided, in whole or in part, providing the debtor (1) uses the federal exemption scheme, and (2) has some remaining “wild card” exemption to apply to the non-residential real estate. However, such lien avoidance motions cannot be brought if the debtor uses the New York State exemption scheme, since New York has no “wildcard” exemption that can be applied to real estate.
A judicial lien based upon non-payment of a Domestic Support Obligation such as alimony or child support can never be avoided under Section 522 (f). In addition, for a debtor to avoid a judicial lien, the debtor must have owned the real estate before the judicial lien attached to it. If a judicial lien attaches to real estate at the same time that the debtor acquires an ownership interest in said real estate, the lien cannot be avoided. This can happen unknowingly, as when a wife who is unaware that there are judgments recorded against her husband goes ahead and executes and delivers to the husband a quit claim deed transferring to him an interest in the marital residence. If the husband thereafter files a Chapter 7 bankruptcy petition, although he will be fully able to claim his homestead exemption, he will be unable to avoid said judicial lien under Section 522 (f).
To discuss the avoidance of judicial liens and any other bankruptcy-related matter, call 845-343-6227 and arrange a free consultation with one of the experienced bankruptcy lawyers at Hayward, Parker & O’Leary.