Liens come in three forms. They are either consensual, statutory or judicial.
A consensual lien is where a debtor voluntarily grants a lien against oneself and is most typically seen in the form of a home mortgage. In exchange for a loan, the debtor voluntarily grants a lien (security deed) against his/her property. A statutory lien is created with the power of a statute, and is most commonly used by the government to lien unpaid taxes. A judicial lien is created when a creditor gets a judgment. An example is a debtor sued by American Express in State Court on a credit card debt.
As all three are different animals, not surprisingly they are all treated differently under the bankruptcy code. A statutory lien is the most powerful creditor lien and can almost never be avoided. This means the debtor must deal with this lien and cannot wipe it out by filing bankruptcy. Furthermore, an income tax lien can attach to all personal property. This is true even if the debt itself was discharged in the bankruptcy.
The next most powerful lien is a consensual lien. In a Chapter 7, a consensual lien like a mortgage cannot be avoided; however, in a Chapter 13 proceeding, the lien can be avoided if the mortgage is entirely unsecured AND the debtor completes the Chapter 13 plan and gets a discharge. This is called “lien stripping.” For more on lien stripping, click here.
The easiest lien to avoid is a judicial lien. Under 11 USC 522(f), a judicial lien can be avoided to the extent it impairs the debtor’s exemptions, which a lot of times means it can be avoided in its entirety.Although judicial liens cannot attach to after acquired property and the underlying debt will presumably have been discharged, it will remain in the public record if the lien is not avoided by the debtor filing a motion. This can be problematic for the debtor if it wants to purchase a refinance several years down the road, and thetitle search reveals the lien. This could delay or impair the closing, because the lender might not be sure of its validity.
Although many attorneys will run lien searches, it is imperative for debtors to tell their attorneys about all liens at the initial consult. Debtors can then know which liens can be removed and which cannot ahead of the filing.