There are three kinds of liens- judicial, statutory and consensual liens. Each lien is treated differently in bankruptcy. Some liens can be avoided, while others cannot.
Let’s start with judicial liens, as these are the easiest to avoid. Code section 11 USC 522 allows debtors to avoid judicial liens when the judicial lien impairs the debtor’s exemption. Take the scenario that the debtor owns a house where valued at $150,000 and the debtor has a mortgage of $200,000 and American Express sued the debtor and gets a judgment for $20,000. The American Express judgment is a judicial lien since it arose from a lawsuit; therefore, the lien in this scenario can be avoided because it is impairing the debtor’s exemptions.
If on the other hand, the house was worth$150,000, but the mortgage was just $100,000, and the debtor can only exempt $10,000 in homestead equity, the judicial lien of $20,000 would not be impairing the debtor’s exemption and it could stay on the property. Note that the equity exemption amount will vary by state, and the $10,000 per person homestead equity is what is allowed in Georgia, and what I need to consider as a bankruptcy lawyer in Jonesboro, Georgia. However, the majority of time in Chapter 7, judicial liens can be avoided because they are impairing the debtor’s exemption.
Statutory liens cannot be avoided, because these liens arise by statute through special powers given by the legislature to entities like the IRS, your State Department, your county for property taxes or homeowners associations. These liens arise by statute and they occur by default of the debtor. There is no lawsuit involved to create these liens and they cannot be avoided in bankruptcy. They must be satisfied, assuming the debtor is maintaining of wants to keep the property. They would have to be paid off in a chapter 13. In a chapter 7, they would not have to be paid off, because there’s no repayment plan, but they will remain on the property.
The final kind of lien is a consensual lien. This is a lien voluntarily granted by a debtor. This most typically occurs when the debtor is getting collateral. In exchange, the debtor voluntarily gives a lien in exchange for the money to purchase the collateral. The lender would not loan the money to the debtor to purchase the collateral without a secured lien on the house.
In this scenario, the lien cannot be avoided in Chapter 7. Mortgages cannot be avoided in Chapter 7 bankruptcy; however, in Chapter 13 bankruptcy, you can avoid a second mortgage if it is entirely unsecured. This is called lien stripping. So if the house is worth $150,000 and the first mortgage is $160,00 and the second mortgage is $40,000, the second mortgage is entirely unsecured, because the balance of the first mortgage exceeds the balance of the house. In this scenario, the debtor can avoid the lien even though it’s a consensual lien.