Bankruptcy can discharge you of your obligation to payback a secured loan. However, if a creditor puts a lien on your property, then it’ll survive your Chapter 7 bankruptcy discharge, provided you’ve not returned the concerned property to the concerned creditor.
What do you mean by a lien?
Lien is created by a creditor or any one that has a security interest over your asset. Liens are actually an inherent part of secured debts. Secured debts are those for which the borrowers have pledged a certain item of their properties as collateral. In other words, loans that have originated against a collateral that would guarantee their timely repayment are known as secured debts.
Hence, if you fail to make the monthly payments when they are due, then your creditors may have the collateral repossessed. The legal claim over your collateral by the creditors is referred to as a lien. For instance, in case of your mortgage, if you fail to make the monthly payments, then your lender may create a lien against the collateral you signed as a security to get the loan money back.
Liens, at times, can be initiated against you without your approval or consent. Take the instance of a lien imposed on your property (or any asset) by the Internal Revenue Service (IRS) for failing to pay off your tax debts.
Chapter 7 bankruptcy: The fate of the liens
There are parts to a secured debt and each one of them is treated differently in a Chapter 7 bankruptcy case:
- First is the lien (or legal claim) slapped on your property (here, the collateral) by the creditors since it is very much a part of their security interests. These liens grant the creditors with rights to repossess your collateral. They may even have that sold, in case you default on the loans. Moreover, in absence of the collateral, you may get sued by the creditors and that they can collect other remunerations from you on the basis of the collateral’s actual market value. Once placed, liens won’t go away, even if you transfer the ownership of the property to someone else. Basically, bankruptcy cannot drop the liens placed on your property, but you may use it to eliminate them through various other means. Or else, you can even get the liens reduced as liens on collateral for the sake of security interests.
- Second part of a lien is your own liability for the timely repayment of the loans, as per the terms of their agreement. Here, bankruptcy may have some of these liabilities of yours wiped out, provided the debts concerned qualifies for the bankruptcy discharge. As a result of a complete discharge, your creditors won’t be able to sue you again or even attempt to collect any of the discharged debts.
It is important to note here that you’ll have to continue making the repayments towards your secured debts even after getting a discharge under the Chapter 7 bankruptcy because liens will remain in effect after that. This will enable your lenders to have the collateral repossessed.
However, there is no way by which your lender can sue you for any sort of deficiency because you’ve been discharged of your personal financial obligations under the said bankruptcy. The deficiency here basically refers to the difference in amount from what you actually owe to your creditors and the real value of the collateral.
A case study: Sam has bought a car from an automobile dealer. He signed an agreement whereby he’s obligated to pay for the car over the next three years. The agreement has a clause stating that the automobile dealer has got a security interest in the car and so, he can repossess it if any of Sam’s monthly payments is more than 90 days late.
In this sort of secured debt, Sam is obligated to pay back the loan since it’s his personal liability, whereas, the dealer enjoys the right to have the car repossessed which is the lien. Though bankruptcy enables Sam to get rid of the debt obligation from paying back the outstanding balances owed to the dealer, yet the creditor can repossess the car because he still holds the lien, as validated by the Bankruptcy Code.
Liens from the lenders: The need for accurate legal claim
As far as bankruptcy is concerned, then any type of security interest agreements are considered as secured debts. This is, however, only applicable if the lien has been constructed with perfection.
The lien must be recorded at the designated local or state records office. Take for example, in order to initiate a lien on a piece of real estate, the mortgage holder (which may be a bank or the other lender) will have to record the same with your property’s local county recorder’s office.
In addition, a perfect lien (or security interest) regarding cars or business assets is one where the lien holder usually has it recorded at the statewide or local agency, as per the Uniform Commercial Code (UCC). Such liens are also known as UCC recordings and they are generally filed with the department of state or secretary of state.
Though bankruptcy code can be a lot helpful in having your back taxes or any other type of security interest quashed, yet it may not be that effective in resolving the liens imposed by the IRS. Remember that liens have been designed so that you make the repayments, regardless of the financial circumstances you might be going through.
Therefore, the only and the most apt way to get rid of the liens is to pay off your debts. Here, it doesn’t matter that you’ve filed for bankruptcy protection. Yes, there are ways by which you can get rid of them, but then they are subjected to procedural conditions.
As a result, an attorney who is a specialist in bankruptcy or tax law or in any other debt laws will be in a better position to tell you whether or not a lien holder has violated your rights or the procedures prescribed therein during the lien creation process.