As part of his or her “fresh start” in bankruptcy, it is possible for a debtor to avoid liens on property securing dischargeable debts. If this is not done, the liens may pass through the bankruptcy and impair the debtor’s ability to move forward. Section 522(f) of the Bankruptcy Code is one of the principal ways that such liens may be avoided. This section of the code has four paragraphs.
Taken together, the section states how a debtor may avoid judicial liens against his or her exempt property to the extent that the lien impairs the debtor’s exemption. It should be noted here that we are speaking in this article only of Section 522(f). Liens may also be avoided by a debtor using other sections of the Bankruptcy Code, such as Sections 506(d) and 522(h). Knowing which section to use will depend on various factors, such as the nature of the lien, the type of bankruptcy filed, and the specific issues of the case.
Section 522(f) is applicable under all chapters of the Bankruptcy Code and may thus be used in Chapter 7, 13, 11, or 12. However, Section 522(f) is not applicable to corporate or business debtors, since it was designed to assist persons or individuals with exempt property. There is no time limit on the use of 522(f); it may be undertaken at any time during a case. Significantly, a previously closed case can be reopened to avoid a lien. This happens frequently, as there are situations where a debtor or debtors may not be aware of the existence of such a lien on their property.
Lien avoidances under 522(f) may be initiated by the filing of a motion under F.R. Bankr. 9014 instead of by adversary proceeding. The debtor has the burden of proof of claiming the necessary exemption in the property and establishing the value of the property. Valuations of property will be dated from the date the case was filed, not when the lien avoidance is undertaken. Basically, to avoid a judicial lien under Section 522(f)(1)(A), the following conditions must be met:
- The lien must be a judicial lien
- The debtor must have an interest in the secured property
- The debtor must claim a valid exemption in the property
- The lien must impair an exemption in the property
The debt should be a dischargeable debt, and not a domestic support obligation
A judicial lien is a lien obtained by a court judgment, levy, or some other legal process or proceeding. Judgment liens are considered to be judicial liens. The debtor also needs to have some ownership interest in the property secured by the lien. However, the debtor does not need to have any equity in the secured property.
The debtor’s interest in the property must also predate the attachment of the creditor’s lien to the property. A lien is considered to “impair” an exemption to the extent that the sum of (1) the dollar amount of the lien, plus (2) the dollar amount of all other valid liens against the property, plus (3) the amount in dollars of the exemption that the debtor could claim if there were no lien against the property, exceeds the value of the debtor’s interest in the property if there were no liens on the property.
Domestic support obligation liens are not included under 522(f), and other types of nondischargeable debts would not fall under this section. Section 522(f)(1)(B) can be used to avoid nonpossessory, nonpurchase money security interests in the following types of property: household goods and furnishings, jewelry, appliances, crops, musical instruments, clothing, tools of the trade, and professionally prescribed health aids of a debtor or a dependent thereof.
The basic goals of the Code here are to prevent debtors from being forced to reaffirm these types of debts, and to allow debtors to get their fresh start without hindrances. A purchase money security interest is basically an interest taken or retained by the seller of the collateral to secure part or all of its price.
As a practical matter, it is normally in the debtor’s best interest to claim the largest possible exemption against the property in question. This is because the amount of a security interest that may be avoided against personal property is dependent on the amount of the exemption claimed by the debtor. Exemption “stacking” is permitted and should be looked into for debtors seeking to use this section of the bankruptcy code. Finally, it is also important to look at whether the federal or state exemptions are being used.
All in all, it is important to remember that the bankruptcy code provides for more than one way of accomplishing certain goals. There are many lien avoidance methods in bankruptcy law. Even if it is not possible to do something under one section of the code, it may be possible to do it under some other section.
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