Portland Bankruptcy Law Group

In our last blog we covered “junior mortgage lien stripping,” emphasizing that it’s only available by filing a Chapter 13 case, NOT Chapter 7. But THIS blog covers another very important tool for saving your home which can work in BOTH Chapter 7 and 13: “judgment lien avoidance.” Here’s how this one works.

If a creditor files a lawsuit against you and gets a judgment, that judgment usually attaches to your home as an involuntary lien against your home’s title, a judgment lien. If you sold or refinanced your home, that judgment would have to be paid in full, usually along with continuously accruing interest plus the creditor’s costs of litigation.

The key to avoiding a judgment lien is the homestead exemption. This exemption is a right granted to you by the state to protect a certain amount of equity in your home from your creditors. Different states’ homestead exemption laws protect different amounts of home equity. In Oregon, you can protect $40,000 of equity in a home owned by a single person, $50,000 of equity in a home owned by a husband and wife. You can only avoid judgment liens on real estate that is your homestead, generally speaking, your “actual abode.”

Whether a judgment lien can be avoided depends on a bunch of numbers: #1) the value of the real estate, #2) the total amount of the liens on this real estate which are legally superior to the judgment lien—generally the outstanding property taxes, the mortgage(s) or trust deed(s), and sometimes other earlier tax or judgment liens, #3) the amount of the applicable homestead exemption (usually $40,000 or $50,000), and #4) the amount of the judgment lien.

The entire judgment lien can be “avoided”—erased off the title—if that lien “impairs,” or cuts into, your homestead exemption. That is, if after subtracting the superior liens (#2) from the value of the property (#1), the equity in the property to which the judgment lien (#4) would attach is less than the value of the homestead exemption (#3), then that entire judgment lien can be “avoided.”

Here’s an example to show how it works. Assume you are single, and have a judgment against you for $15,000:

$    250,000     Value of Home

-   $220,000     First (& only) Mortgage and any unpaid property tax

$      30,000     Equity in home to which the judgment lien would attach.

Since this $30,000 equity in the property to which the $15,000 judgment lien would attach is less than the value of the applicable $40,000 homestead exemption, that entire judgment lien could be avoided through either Chapter 7 or Chapter 13.

“Judgment lien avoidance” takes a special procedure, and can be challenged by the judgment creditor on various grounds. Contact us so we can show you how to undo the advantage that the creditor got over you by getting a judgment on your home.

Portland Bankruptcy Law Group has the experience and knowledge to handle your case. Our bankruptcy lawyers are extremely familiar with and are well versed in all aspects of bankruptcy law. Contact us today!

In our last blog we said that Chapter 13 can “sometimes get you out of having to pay your 2^nd or 3^rd mortgage ever again.” This “junior mortgage lien stripping” is a truly unusual twist in the law that could save you tens or even hundreds of thousands of dollars. Here’s how it works.

1) This “twist” ONLY works in Chapter 13 (the 3-to-5 year payment plan), NOT in Chapter 7 (“straight bankruptcy”).

2) It only works for “consensual liens” –mortgages or trust deeds or equity lines of credit that you signed on to voluntarily. (Sometimes certain other kinds of liens can be gotten rid of with different procedures. For example, see our next blog on judgment liens.)

3) This only works IF AND ONLY IF ALL of the equity in the home is COMPLETELY covered by the “senior” mortgage(s), leaving not a penny of equity to cover the next-in-line mortgage or line of credit being “stripped.”

Example: You bought your home a few years ago for $350,000, with a $280,000 first mortgage and a $50,000 second mortgage, but it’s now worth only $270,000. You now still owe $278,000 on the first mortgage, since almost all of the payments have gone to interest. Chapter 13 would enable you to “strip off” that $50,000 second mortgage. Meaning that instead of having to pay that “junior” debt in full, along with interest and often late fees and other charges, you would only have to pay as much as you could afford during the life of the Chapter 13 case, IF ANY, and then the entire debt would be permanently written off.

This great result is highly unusual for two big reasons:

1) In life, and even in bankruptcy, usually you can’t get out of paying “secured” debt—those attached to collateral like a car loan or home mortgage. If your debt is secured, almost always you must either pay the debt so that you can keep the collateral or surrender the collateral to that creditor. That’s because you had secured your obligation to pay the debt by giving the creditor a right to your property.

2) Debts secured by your home are especially tough to undo. Congress has decided that otherwise banks and investors would be reluctant to invest their capital in the mortgage markets, supposedly leading to higher mortgage interest rates and less people being able to qualify.

This all makes Chapter 13 “junior mortgage lien stripping” so unusual and so valuable.

Portland Bankruptcy Law Group has the experience and knowledge to handle your case. Our bankruptcy attorneys are extremely familiar with and are well versed in all aspects of bankruptcy law. Contact us today!