What does it mean to avoid a lien?

When taking out a mortgage, home equity loan, or home equity line of credit on a home or on some other piece of real estate, a debtor grants the lender a lien on that real estate. Even with no personal liability in bankruptcy to pay a mortgage, a lender will still need to be paid through the lien. The lien allows the lender to foreclose and sell the property if the debtor falls behind on payments under the loan. Bankruptcy, though, can help to stall or even prevent foreclosure. When bankruptcy prevents foreclosure, this is referred to as avoiding the lien.

A debtor can eliminate the lien in addition to eliminating personal liability on a loan without losing the property or home. However, this will require an approved exemption from the bankruptcy judge, and a showing that the property value is less than the lien value. To learn about bankruptcy exemptions, click this link.

It is also possible to avoid a lien and keep property through a discharge of personal liabilities and an agreement with the lender to resume making payments. This option may not be available to those who would have difficulty making further payments or who think they wouldn’t be able to stay current with payments in the future. This option would allow a debtor to avoid foreclosure.

Case Studies: Avoiding Liens in Real Estate Transactions

Case Study 1: The Ancestral Estate

The property owner, facing a judgment of $30,000 and a lien against their ancestral estate named Blackacre, seeks to avoid the lien through bankruptcy. The state law provides a $200,000 homestead exemption, and the judgment lien impairs this exemption.

By successfully filing for bankruptcy, the property owner can avoid the lien and emerge with Blackacre free and clear, though the mortgage lien will still remain due to its voluntary nature.

Case Study 2: Preventing Foreclosure

A debtor has taken out a mortgage, home equity loan, or home equity line of credit on their property. Despite having no personal liability in bankruptcy to pay the mortgage, the lender still holds a lien on the real estate.

Through bankruptcy, the debtor can stall or prevent foreclosure by avoiding the lien. This allows them to eliminate personal liability on the loan without losing their property or home.

Case Study 3: Discharging Personal Liabilities

A debtor aims to avoid a lien while retaining their property by discharging personal liabilities and negotiating a new payment agreement with the lender. This option may not be suitable for individuals who anticipate difficulty in making future payments. However, it presents an opportunity to avoid foreclosure by eliminating personal liabilities and entering into a revised payment plan.