Liens in Bankruptcy Cases

A lien is, in short, a claim by a creditor on the property or assets of a debtor. They are designed to assure the creditor receives compensation (payment or other satisfaction) of a debt. In the event that the individual owing the creditor money cannot pay or refuses to pay the money they owe, the lien may allow his or her property to be foreclosed on and sold, providing the creditor with the compensation they are owed.

Some liens are voluntary (or consensual), meaning that they are put in place by a contract between the creditor and debtor. Consensual liens include mortgages, security interests, car loans, and chattel mortgages. Chattel is defined as moveable property like vehicles, home furnishings, or livestock as opposed to "real" property like land.

Involuntary (or non-consensual) liens are statutory, arising from laws giving creditors the right to assure payment of their loans. They exist to uphold the general nature of a creditor-debtor relationship. Tax liens, attorney's liens, weed liens (assessed by the government to keep properties from becoming a public hazard), and mechanic's liens (assuring payment for work done on property) are all examples of involuntary liens.

When an individual files for bankruptcy, some liens that could otherwise be collected upon can become avoidable through details of the Bankruptcy Code. Three such situations include instances where liens are preferential, liens are secret, or liens impair exemption. The last option, where liens impair exemption, is the most likely to be relevant in the majority of bankruptcy cases.

The Bankruptcy Code allows that debtors are permitted to claim some assets as exempt under certain circumstances. In turn, a lien that might encroach on these exempt assets can sometimes be avoided. In fact, most Chapter 7 bankruptcy cases are considered "no-asset" cases. This means that the debtor will probably not have to give up anything, as many pieces of property, such as those necessary for day-to-day life, are safe from creditors. These exemption laws are not necessarily the same in every state, but there are some that are fairly universal (at least in the U.S.). Retirement IRAs up to $1 million, for example, are exempt in all states.

The ability for people filing for bankruptcy to avoid liens can go a long way in lessening the pains of the entire situation. Keeping important assets, such as a car or retirement fund, makes a fresh start a realistic possibility.

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