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A lien is an interest in property that secures a debt owed by the property owner to the holder of the lien. There are many types of liens, but the most common are consensual liens and judicial liens. Consensual liens, also known as security interests, are those created by contract, such as mortgages on real property or financing liens on vehicles. In New York, judicial liens, commonly known as judgment liens, are created when a judgment is entered against a debtor that owns real property.
Liens generally survive a debtor’s bankruptcy. That is, the debtor’s personal obligation to pay the debt is discharged, while the lien continues to attach to the debtor’s property. However, some liens can be voided in bankruptcy.
Contact the law firm of Andrew M. Doktofsky, P.C. at (631) 673-9600 to find out how bankruptcy can help you. Attorney Andrew M. Doktofsky’s practice is focused on consumer bankruptcy law and he possesses the knowledge and experience necessary to determine if liens on your property can be voided in bankruptcy. Call (631) 673-9600 today if you have questions about liens and bankruptcy throughout the areas of Suffolk County and Nassau County, New York.
Judicial liens, also known as judgment liens, arise out of court proceedings and result when a creditor obtains a judgment against the debtor. In New York, judicial liens attach to all real property owned by the debtor in the county or counties in which the judgment is entered. Judicial liens against real property can be voided when the judgment lien impairs the debtor’s homestead exemption, to the extent that it impairs the exemption. A brief explanation is as follows:
In New York, a debtor is given an exemption in his or her principal residence (the exemption varies based on county of residence – from $82,775 to $165,550). A judgment lien can be voided to the extent that it impairs this exemption. For example, a debtor owns a home with $50,000 of equity. A $20,000 judgment lien would interfere with the debtor’s homestead exemption in that it attaches to the portion of equity in the home that is exempt. In this scenario, the judgment lien can be voided in its entirety.
In order to void a judicial lien in New York, it is necessary for the debtor to file a motion in the bankruptcy case. The bankruptcy court must be presented with evidence of the value of the debtor’s home. If successful, the bankruptcy court then issues an order voiding the lien. This order is then filed with the appropriate county clerk’s office so that the clerk’s records accurately show that the judgment lien has been removed from the property.
A non-purchase money security interest is created when a debtor borrows money and a creditor takes a security interest in the debtor’s personal property. In this situation, the loan is not for the purchase of a particular item, such as a car. It is common for credit unions to take security interests in the debtor’s personal property when giving loans. Such non purchase money security interests can be voided to the extent that the security interest impairs the debtor’s exemption for household goods and furnishings. See the property exemptions page for a more detailed discussion of exemptions.
The same analysis, as explained above under judicial liens, is performed to determine if the non-purchase money security interest impairs the debtor’s exemption. A motion must then be brought in the bankruptcy court to have the security interest voided.
Secured claims, other than those secured only by a security interest in the debtor’s principal residence, can be modified in Chapter 13. However, if the final payment on a mortgage secured by the debtor’s principal residence will come due during the pendency of the plan, e.g. a balloon payment, then the claim can be modified. The cramdown may be used to modify mortgages secured by real property that is not the debtor's principal residence, such as rental properties and second homes. Modification generally means that the secured creditor will be paid less than the remaining balance due. However, unless the secured creditor agrees to the modification, the plan must propose to repay at least the value of the collateral plus interest. The interest rate to be paid is based on the Supreme Court decision in Till v. SCS Credit Corp. – calculated by adding a risk factor to the prime rate of interest. The risk factor is usually between 1% and 3%.
The cramdown is most commonly used with motor vehicle loans. However, the cramdown may not used if the vehicle was purchased within the 910 days prior to the filing of the bankruptcy petition and was purchased for the personal use of the debtor. Also, the cramdown is not available for any secured property for which the debt was incurred within one year preceding the bankruptcy filing.
If the debtor is successful in cramming down the lien on the vehicle or other property, then the balance of the loan above the value of the property is considered an unsecured debt, and will be treated in the same manner as other unsecured debts are under the debtor’s Chapter 13 plan.
The Chapter 13 cramdown may not be used for claims secured only by a security interest in the debtor’s principal residence. However, in Chapter 13, the debtor can void junior mortgage liens (e.g., second mortgages and home equity loans) on the debtor’s primary residence, if the value of the property is less than the balance due on the first mortgage. This is commonly known as a “lien strip” and can only be done when no equity attaches to the junior mortgage, i.e. it is “wholly unsecured”. The reason why this can be done is that when the balance owed on the first mortgage is greater than the value of the property, there is no equity left for the second mortgage to attach to. Of critical importance is the value of the property. If there is even one dollar in equity above the first mortgage, then the second lien cannot be voided.
In order to have the bankruptcy court void a subordinate mortgage, the debtor must commence a separate proceeding in the bankruptcy case, and an appraisal will have to be performed to determine the value of the property.
If the debtor is successful in showing that the value of the property is less than the balance due on the first mortgage, then any subordinate mortgage liens will be classified as unsecured debts, and will treated in the same manner as other unsecured debts under the debtor’s Chapter 13 repayment plan. Upon the debtor’s successful completion of the Chapter 13 plan, the junior mortgage lien will be voided, and the debtor will no longer be required to make payments on the junior mortgage.
Section 722 of the Bankruptcy Code allows a Chapter 7 debtor to remove a lien on personal property by paying the secured creditor the market value of the property. For instance, if the debtor owes $10,000 on a car worth $5,000, the debtor can pay the creditor $5,000, thereby eliminating the creditor’s security interest.
This may be a viable option for debtors who have sufficient cash (that the debtor has exempted). Also, debtors may be able to obtain financing that is specifically offered for redemption purposes. While the interest rate for these loans is extremely high, the lower principal amount can result in substantial savings to the debtor.
The Bankruptcy Court for the Eastern District of New York - This court serves the Eastern District of New York, including the counties of Nassau, Suffolk, Brooklyn and Queens, and is a unit of the U.S.District Court.All bankruptcy proceedings in the Eastern District of New York are filed in this court.
USBC-EDNY Local Rules – This link is to the local rules for the United States Bankruptcy Court for the Eastern District of New York.These rules vary from the federal rules, and are applicable only to the USBC-EDNY.
Chapter 7 of the United States Bankruptcy Code – Title 11 of the United States Code, which is entitled “Bankruptcy,” contains the federal lawregarding bankruptcy.The Code governs all bankruptcy cases in the United States.This link is directly to the rules pertaining to Chapter 7 bankruptcy.
Chapter 13 of the United States Bankruptcy Code – Title 11 of the United States Code, which is entitled, “Bankruptcy,” contains the federal law regarding bankruptcy. The Code governs all bankruptcy cases in the United States. This link is to the laws pertaining to Chapter 13 bankruptcy.
Contact the law firm of Andrew M. Doktofsky, P.C. today at (631) 673-9600 for a free consultation about how bankruptcy can help you with your secured debts in Suffolk County and Nassau County, New York. Andrew M. Doktofsky can determine if liens on your property can be voided or reduced in bankruptcy. Call today for a consultation about your lien and bankruptcy options in New York.
Contributor: Andrew M. Doktofsky