A successful bankruptcy can be like a magic wand, eliminating your responsibility for paying debts. The wand can only affect debts, however, not liens created by them – they're two separate things. If you owe someone money and he goes to court and gets a judgment against you, and if he then uses the judgment to create a lien against your property, your bankruptcy discharge removes only your liability for the underlying debt. Removing the lien – called "avoiding" it in bankruptcy terms – involves taking an extra step.
Motion to Avoid Lien
Although removing or avoiding a lien doesn't happen automatically as part of your Chapter 7 proceedings, it's relatively easy to accomplish if you have not received a discharge yet. You can file a request with the bankruptcy court called a motion to avoid lien. You must serve a copy of the motion on all interested parties. These include the trustee and the creditor who perfected or created the lien. The creditor can object by filing a response to your motion, and in that case, the court will hold a hearing and decide the issue.
Conditions of Avoidance
When you filed your bankruptcy petition, you will have submitted a Schedule C, which is a list of exemptions. You should include the property with the lien and exempt as much a you can under the exemption laws of your state (or the federal bankruptcy exemptions, depending upon the circumstances). Exemptions protect any equity in the property so the trustee cannot liquidate the property to pay your creditors.
Successfully avoiding the lien requires that there is no equity in your property after accounting for the mortgage lien and your homestead exemption. There's no value available to the creditor to satisfy the underlying debt. Liens can be avoided in part in some jurisdictions such that if there is some equity for the lien but not enough, the lien remains to the extent of the equity.
Chapter 13 Bankruptcies
If you filed for Chapter 13 rather than Chapter 7, avoiding a lien also requires a motion. The process is similar; you must establish to the court's satisfaction that the value of the property is not sufficient to cover all encumbrances against it.
Consensual liens, such as those created by a second mortgage or home equity loan, may also be removed, although they are stripped rather than avoided. If your property is underwater – its fair market value is less than the first mortgage against it – a successful motion "strips off" junior lienholders. Their associated liens are removed and these become unsecured debts.
Lien stripping of mortgages is not permitted in Chapter 7 cases, and in Chapter 13 cases, it will only succeed if the first mortgage is undersecured. If there is even a small bit of equity for the second mortgage, it can't be stripped. In a Chapter 7, only non-consensual liens may be avoided.
Liens After Discharge
If you've already received your Chapter 7 discharge, it's not too late to avoid a lien. You must reopen your bankruptcy first, however. Doing so doesn't affect your discharge – you're still absolved from responsibility for paying your eliminated debts. You must first file a motion asking the court to reopen your proceedings, and then you file a second motion to avoid the lien. You must meet all the same conditions that would have applied had you filed the motion before your discharge.