The primary reason you likely sought Chapter 13 bankruptcy protection is to protect your property from foreclosure or repossession by your lenders. Once your bankruptcy case was filed, you were given protection against your creditors from any collection activities. However, if your bankruptcy case is dismissed your lenders can take actions against you and your property, including placing a judicial lien against it.
Chapter 13 Dismissal
In Chapter 13 bankruptcy, you were placed on a three- or five-year plan where you would make monthly payments to a court-appointed trustee, who in turn would pay your creditors. If you successfully complete your repayment plan, any liens and other debt actions against you are discharged. However, your bankruptcy case could be dismissed if you fail to make these payments, failed to properly submit your paperwork to the court or did not attend credit counseling. While you were under your Chapter 13 plan, you were protected by any collection actions by your creditors through an "automatic stay." If your case is dismissed, you lose all protection from creditors afforded by the automatic stay.
Judicial Property Liens
A property lien is a court-approved claim against your assets, such as your house or car, that allows a creditor to take possession of the property if you do not pay a debt. Generally a judicial lien arises after a court enters a judgment in a lawsuit against you and orders you to pay damages to the party that filed the lawsuit. Creditors generally file civil lawsuits to recover unsecured debts, such as credit card debt and personal loans. After a creditor obtains a judgment, it tries to collect on it by placing a lien on your property. The lien allows the creditor to take your property and sell it to pay off what you owe. In addition to judicial property liens, you may also be subject to a mechanic's lien against your home if you owe money to a contractor who performed work on your house.
If you are in bankruptcy and own a home, you likely have a mortgage on the property. If a creditor attaches a lien against your home, the judicial or mechanic's lien is secondary to the mortgage. That means if you are insolvent and in foreclosure, the bank gets first priority over seizing and selling your home. Any remaining money left in the property, if there is any, is given to the creditor that has a judicial property lien against your home.
Under Chapter 13 bankruptcy you may be eligible to remove any liens against your property if the lien impairs your ability to take full advantage of your bankruptcy rights. Under Chapter 13 you are provided certain exemptions that allow you to reduce the amount of monthly payments you make to your creditors. If you live in a state that allows you to preserve all or most of your home's equity during bankruptcy through a homestead exemption, you may be able to use the homestead exemption to strip any liens placed on your home. If you do not have sufficient equity in your home to cover the judicial lien and the full amount of your state's homestead exemption, the lien is said to "impair the exemption" by preventing you from using the full amount of your bankruptcy protection for your home. In these cases, the bankruptcy court has authority to strip the judicial lien from your home.
- McDonald Law Offices: Dismissed Cases
- The Money Alert: What Is a Lien?
- Legal information Institute: Debtor and Creditor: An Overview
- Chapter 13 Info: Dismissal Vs. Discharge
- Credit InfoCenter: The Dismissal of Your Bankruptcy Petition
- Bankruptcy Law Network: Exemptions: What They Are, and Why They Matter
- Long Island Bankruptcy Blog: Avoiding Judicial Liens in Chapter 13 Cases
- Bankruptcy Attorney David Nelson: Chapter 13 Lien Stripping
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