In a Chapter 7 bankruptcy you are not be able to avoid junior mortgages or equity lines of credit (considered to be consensual liens) on your property even if your house is underwater. Treatment of underwater liens is different in a Chapter 7 case then a Chapter 13 case. However, the good news is that you can avoid a judgment lien in a Chapter 7, thereby removing the judgment lien from your real property.
What is the difference between a consensual lien and a judgment lien? A consensual lien is a bargained for lien - this is normally referring to liens like your mortgages or equity line of credit. You agreed to have a lien recorded against your property in exchange for financial benefit (money loaned to you). A judgment lien is not consensual. This type of lien is normally recorded against your property after your creditor obtains a judgment against you. Thus, the rule in a Chapter 7 bankruptcy is that you can avoid a judgment lien since it was involuntarily placed on your property and you cannot avoid a consensual lien since you agreed to have it recorded against your property. The courts do not want to interfere with any contracts that you voluntarily entered into. You can strip underwater junior liens and equity lines of credit in a Chapter 13 bankruptcy, but not a Chapter 7 bankruptcy.
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If you file a Chapter 7 bankruptcy and you have judgments that you would like to avoid from your property, you have authority to do so under 11 U.S.C §522. In order to avoid the judgment lien, the lien needs to impair an exemption. Exemptions are what protect your property that has value from becoming part of the bankruptcy estate. So if you have a lien that combined with all the other senior liens on your property and your exemptions on the property exceed what your house is worth, you can avoid the lien from the judgment and avoid it from your property. Even if your property is underwater and there is no equity to exempt you can still apply an exemption and avoid the judgment lien. This is a jurisdictional issue that must be researched in your jurisdiction though. The majority of the courts indicate that you can still avoid a judgment lien even if no exemptions are being impaired. The lien only has to impair an exemption that the debtor could have claimed. Remember, only non-consensual liens like a judgment lien can be avoided under Chapter 7 bankruptcy, not consensual liens like mortgages.
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