Under Oregon law (ORS 18.150), a judgment entered or registered in the county where the debtor owns real property generally becomes a lien against that property. Theoretically, a lien creditor may have the right to foreclose on the lien in order to collect the money owed. In actual practice, however, the lien creditor simply waits until the debtor sells or refinances the property, and is paid at that time from the closing of the sale or refinance.
Under some circumstances, if the debtor files for bankruptcy, he or she can void the lien against the property. Bankruptcy law permits that debtor to void a “judicial lien” if the lien impairs the debtor’s homestead exemption. As discussed in one of our prior posts, a debtor may claim a $40,000 exemption ($50,000 for a married couple filing jointly) under Oregon law, or $22,975 ($45,950 for a married couple filing jointly) when filing for bankruptcy.
As an example, let’s take a case where a married couple files a joint bankruptcy case using Oregon exemptions, and they own a home worth $250,000. The balance owed on their mortgage is $200,000, and they also have a judgment against them for $25,000 which is a lien on the home. Without the judgment lien, this couple has $50,000 equity in the home, so the $25,000 judgment lien impairs the homestead exemption. In this case, the lien can be voided.
On the other hand, let’s say that the value of the home is $350,000. In this scenario, the lien cannot be voided, as there is $100,000 in equity in the home over and above the homestead exemption. While the couple is entitled to discharge the debt as to themselves personally, the lien against the home remains. As noted above, in order to collect the money, the lien creditor will have to either foreclose on the property or wait until the home is sold or refinanced.
Important factors regarding voiding liens include the following:
· Assuming that a debtor is entitled to void a lien against real property, he or she must file a motion with the Bankruptcy Court and obtain an order voiding the lien. If a motion is not filed, the lien against the real property will survive, even if the lien would have been voided if the proper motion was filed.
· The lien at issue must be a “judicial lien” as defined by statute in order to be voidable. Types ofliens which are not “judicial liens” (and therefore not voidable) include mortgage loans, property tax liens, and income tax liens. However, as discussed in one of our prior posts, some “non-judicial liens” can be voided under a different provision of the Bankruptcy Code if there is no equity in the property to support the lien.
· The real property at issue must be claimed as exempt. If no exemption is available (e.g., the real property is a rental home not occupied by the debtor), a judgment lien cannot be voided.
· The hypothetical costs of sale of the property cannot be deducted from its value for purposes of determining the amount of equity.
· The lien creditor must be served with a copy of the motion, and it has the right to contest the motion. If the creditor is able to show that the lien does not in fact impair the homestead exemption, the Court will deny the motion.
· If the Court enters an order voiding a judgment lien, it is a good idea to record the order in the real estate records of the county in which the real property is located to eliminate any disputes when later selling or refinancing the property.
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to the voiding of liens in bankruptcy, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.