Pre-Bankruptcy Judgment Liens in Louisiana:

One of the most important tools in any creditor’s chest is the judgment lien.  When recorded in the mortgage records, the judgment acts as a lien on any immovable or real property owned in the parish where recorded.  Judgment liens often sit for years when an account is otherwise uncollectible.  That is until the creditor’s attorney receives the coveted payoff request from a title company.

When a debtor tries to sell or refinance the property, the title company is obligated to do a title abstract that will reveal the judgment lien which must be paid off during the closing.  Because of this invaluable collection method, it is prudent to search for available assets and record the judgment in those parishes, accordingly.

But what happens to the lien when a debtor files for bankruptcy?

Are Judgment Liens Avoidable in Bankruptcy?

The short answer is it depends.

Generally, liens pass through bankruptcy intact following the discharge.  The debtor’s personal liability is the only thing that is discharged by the bankruptcy.  If the debtor’s property is also liable for the debt, the lien remains following the discharge.  Following the bankruptcy, the secured creditor may enforce the lien against the property, but the creditor cannot collect any deficiency balance.

Statutory liens (such as tax liens) and voluntary liens (such as mortgages and car loans) are never avoidable.

When Can Judgment Liens be Avoided?

There are options for lien avoidance in Chapters 13 and 7.  Per 11 U.S. Code § 522(f), when a pre-bankruptcy judgment lien impedes on the exemption of the debtor, the debtor can have the lien avoided.  Currently, the homestead exemption in Louisiana in bankruptcy is $35,000.  That means a debtor who has less than $35,000 in equity in their home can avoid any judgment liens.  This can be done by filing a motion and serving the creditor.  If granted, the lien no longer attaches to the property.

Pre-bankruptcy judgment liens can be avoided partially if there is more than $35,000 in equity but not enough equity to cover the exemption and the judgment lien.  In that case the creditor would have a bifurcated claim with a secured amount equal to the debtor’s equity minus the exemption amount, and an unsecured claim for the remainder of their judgment balance.

What Can Creditors Do in Chapter 13?

Creditors have different options depending on the circumstances.  If served with a motion to avoid a lien, the creditor should examine it and any exhibits and file an objection if they disagree with any part of it.

A prudent creditor, though, will get ahead of the issue prior to a debtor’s motion.  After being served with a bankruptcy notice, a creditor or their attorney should examine the plan and schedules.  Next, the creditor will file a proof of claim.  If the creditor knows they have a judgment lien on property, they should file the proof of claim as a secured claim.

If the review of the plan and schedules shows that the debtor is treating the creditor as unsecured, then the creditor should also file an “objection to confirmation of plan”.  Why would a debtor treat the creditor as unsecured?  It is not uncommon for a debtor or their attorney to simply not know about a judgment or that it was recorded.  The underlying debt may be unsecured such as a credit card or personal loan.  If the creditor received a default judgment they may not know or have forgotten.

A creditor may also object to the plan if they see in the schedules that there is not enough equity to pay their judgment lien and if they disagree with the valuation of the property.  It is in the debtor’s interest to value the property as low as possible, so this is a common issue.  The creditor will have to provide its own valuation evidence, though, which is not always easy to obtain.  When this issue is spotted, it can be expected that the debtor is going to move to avoid the lien.

If the creditor is successful with an objection, they will get to enjoy secured status in the bankruptcy and will be paid by the trustee.  Our clients are often overjoyed when they learn that will be paid in the bankruptcy for a debt that was originally unsecured, especially if they were receiving few or no payments prior to the bankruptcy.

What Can Creditors Do in Chapter 7?

If the debtor files a Chapter 7 bankruptcy, it is highly likely that they didn’t have any equity in their home beyond the exemption.  Otherwise, they likely would have chosen a Chapter 13.  That’s because a Chapter 7 is a liquidation rather than a reorganization.  If the debtor has assets beyond the exemptions, the trustee is obligated to sell those assets and pay creditors.  Thus, this is a mostly moot issue in Chapter 7, unless the debtor fails to formally avoid the lien.

If a debtor does not have a judgment lien avoided during the pendency of their Chapter 7, the lien will survive.  Then when they try to sell or refinance property years later, the lien will show up in the title abstract.  Since it was a Chapter 7, it is highly likely that it would have been avoidable.  Debtors have the option to reopen a Chapter 7 for the purpose of avoiding pre-bankruptcy judgment liens.  Because this can be a costly and time-consuming endeavor, it is common for debtors to just offer a relatively small amount of money to the creditor in exchange for a partial release of the property.

Do Pre-Bankruptcy Judgments Attach to Property Acquired After the Bankruptcy?

Property acquired after a bankruptcy discharge are never encumbered by a judgment granted prior to the bankruptcy.  Essentially, the personal liability for the underlying debt has already been extinguished.  Only the in rem rights of the creditor survive the bankruptcy, and those rights are limited to only that particular property.

Louisiana Creditor Bankruptcy Attorneys:

We are a Gretna law firm that has served the New Orleans area since 1980.  Our experienced creditor bankruptcy lawyers are well versed at handling creditors’ rights matters throughout Louisiana for many local, regional, and national creditors.  We take pride in offering an effective and efficient experience.  Call us today for a free consultation and find out why so many of our clients come back to us.