Navigating Bankruptcy Law

There are situations where a creditor will place a judicial lien on a debtor's real estate either in the form of a real estate attachment or an execution. A judicial lien is a lien that arises from a lawsuit against the debtor. This lien is a cloud on the owner's title. It is also called an "encumbrance" on the property. This means that the creditor is now able to exercise certain options regarding the real estate. The creditor that has recorded an execution could conduct a sale of the property which is often referred to as a Sheriff's Sale. More commonly, the creditor will simply let the lien remain as a cloud on title. An attachment on real estate is valid for six (6) years while an execution remains a cloud on title for twenty (20) years. These liens transform the creditor from being unsecured (meaning that there was no collateral to secure the obligation) to being secured by the real estate that has been encumbered by the lien. Should the owner of the real estate seek to sell or refinance the property, the lien must be paid off, or in technical legal terms, the lien must be "satisfied" as a condition of the sale or refinancing of the property. By placing the lien on real estate, the creditor has improved its status (from "unsecured" to "secured") and is now able to affect the landowner's ability to sell or refinance the property. These judicial liens are considered "non-consensual" meaning that the property owner did not voluntarily sign any papers that would automatically create a secured status. Examples of consensual liens would be mortgages or home equity lines of credit in which the property owner contracts with the lender and grants the creditor a lien on the property.

One of the powers of the bankruptcy court is that it can, under appropriate circumstances, invalidate judicial liens and remove the cloud on title. The term that the court uses is that the lien is "avoided." Once such an order from the bankruptcy court avoiding a lien is recorded at the registry of deeds, the cloud on the title no longer exists and the property owner can sell or refinance the real estate without having to satisfy the avoided lien. This is an important right that debtors can exercise so that they can get the "fresh start" that is the purpose of the bankruptcy laws. Although lien avoidance is available to many debtors in bankruptcy, there are circumstances where lien avoidance is not attainable. It is important to consult with an experienced bankruptcy attorney to determine whether this procedure can benefit your circumstances.

Lien avoidance should not be confused with mortgage cramdowns. A cramdown may be available where the value of the collateral, usually real estate or a vehicle, is worth less than the amount of the mortgage or vehicle loan. The bankruptcy court has the power to reduce the amount of the debt secured by collateral to the actual value of the collateral. For example, if a vehicle is worth $10,000 but has a loan with a balance of $12,000, the court can cramdown the amount of the loan to the $10,000 value of the vehicle. Cramdown is not available for a single-family home that is the debtor's residence. It is available for commercial real estate and multiple-family homes regardless of whether the debtor resides at the property. Bankruptcy law is extremely complex, and it is strongly recommended that people considering bankruptcy as a means of discharging their debts consult with an experienced bankruptcy attorney before taking any action. It is vital that people understand the options available to them and how the law can be used to their best advantage. This has never been truer than during these very difficult financial times. It has become commonplace for people who recently had excellent credit to now face lawsuits or foreclosure due to their inability to make their monthly mortgage or credit card payments.