Legal Definitions - lien avoidance

Lien Avoidance refers to a specific legal action available to debtors within the context of bankruptcy proceedings.

To understand this, it's helpful to first know what a lien is: A lien is a legal claim or right that a creditor holds against a debtor's asset (such as a house, car, or equipment) to secure a debt. If the debt isn't paid, the creditor can potentially take that asset to satisfy what is owed. Lien avoidance is the process by which a debtor in bankruptcy can legally eliminate or "undo" certain types of these liens.

The primary purpose of lien avoidance is to protect a debtor's ability to keep certain property that is considered "exempt" under bankruptcy law. Exempt property is a category of assets that a debtor is allowed to retain, up to a certain value, even after filing for bankruptcy. If a lien prevents the debtor from fully benefiting from these exemptions—meaning the lien would take away property the law says they should be able to keep—the bankruptcy court may allow the debtor to avoid that lien.

Here are some examples to illustrate how lien avoidance works:

• Example 1: Judgment Lien on a Primary Residence

  Imagine Sarah files for bankruptcy. She owns a home worth $300,000, and she has a first mortgage of $280,000. Separately, a credit card company sued her for an unpaid debt and obtained a judgment lien against her home for $30,000. Under her state's laws, Sarah is allowed to exempt $25,000 of equity in her primary residence (her homestead exemption).

  In this scenario, the judgment lien from the credit card company "impairs" her homestead exemption. The home's value ($300,000) minus the first mortgage ($280,000) leaves $20,000 in equity. Since this $20,000 is less than her $25,000 exemption, the judgment lien has no actual equity to attach to without encroaching on her protected amount. Sarah can file a motion for lien avoidance to remove the $30,000 judgment lien from her home, allowing her to keep her home and fully utilize her homestead exemption.

• Example 2: Non-Purchase Money Security Interest on Household Goods

  Consider David, who needed a quick loan. He went to a finance company and used his existing living room furniture and television as collateral for a $2,000 cash loan. This is a "non-purchase money security interest" because the loan wasn't used to buy the furniture itself. David later files for bankruptcy. His state allows him to exempt up to $5,000 worth of household goods.

  The finance company's lien on David's furniture and TV impairs his ability to exempt these essential household items. Because it's a non-purchase money security interest on property that is generally exempt, David can use lien avoidance to remove this lien. This means he gets to keep his furniture and TV free and clear, without having to pay the finance company for that specific lien in bankruptcy.