By John Lee
Generally speaking, liens are not dischargeable in bankruptcy. There are several different types of liens, including voluntary liens (mortgage and car notes), judgment liens (from when a creditor sues you), and statutory liens (real estate taxes and homeowners association fees). When you file for bankruptcy, the debts associated with these liens can be discharged, but the creditor can still exercise his rights (such as repossession and foreclosure) against the property.
Liens & Bankruptcy Trustees
Chapter 7 Bankruptcy Trustees will take property from you and sell it for the benefit of your creditors if it is not exempt or encumbered by liens. The Chapter 7 Bankruptcy Trustee will not take a house that is fully secured by a home loan because there would be no money left over for the unsecured creditors after the mortgage company was paid for their lien. In Virginia, if you want to keep your house, it is very important to have a lien against the property because Virginia, unlike most States, only allows you to keep $5,000.00 equity in your house. Pursuant to the Tenants-by-the-Entirety Exemption, if you are married, purchased the house during the marriage, have no joint debt and meet some other requirements, then you may be able to keep your house even if it has more than $5,000.00 equity.
The Bankruptcy Trustee is only required to recognize a validly perfected lien. If the lien against your house is not perfected, then the Bankruptcy Trustee does not have to recognize it and will take the house and sell for the unsecured creditors. At the 341 hearing, the Bankruptcy Trustee asks to see the deed, deed of trust and mortgage statement. The Chapter 7 Bankruptcy Trustee wants to verify that that the lien is properly recorded and the debt (and exemptions) exceeds the value of the home. If the Bankruptcy Trustee determines that the lien was not properly perfected, then he will be able to sell the house to raise funds to pay the unsecured creditors.
What constitutes an improperly recorded lien?
There are several ways in which a lien would not be properly recorded. If a Deed-of-Trust were never sent to the court house for recording after the debtors signed it, then that would be the most obvious recording error. If a Husband and Wife were both on the Deed, but only one of them executed the Deed-of-Trust then that would be an error. Another example of an error would be where there were originally two parcels of land, but the Deed-of-Trust was only recorded against one of the two parcels. By producing copies of the Deed, Deed-of-Trust and mortgage statement, the Bankruptcy Trustee can determine if the liens were properly recorded.
Liens on Automobiles in Virginia
The process is the same with automobiles except the lien is recorded with the DMV. The State requires most automobiles, recreational vehicles, motorcycles, and mobile homes to be titled. When a lien is recorded against an automobile it must be recorded at DMV to be valid. If the lien, for whatever reason, is not recorded at DMV, then the Trustee may take the property and sell it for the benefit of the unsecured creditors.
There are a few situations that arise with automobile liens. The State allows a car dealership a certain amount of days to record the lien with the DMV after the car is sold to the debtor. If the dealership, or DMV, fails to properly file the lien during the allotted time, then the Chapter 7 Bankruptcy Trustee can take the car and sell it. If the lien is not properly recorded, this error can be cured by properly filing the title and waiting until the look back period has expired before filing the bankruptcy. In some instances, the debtor may choose to file the bankruptcy knowing the lien was not properly recorded. The debtor would do this if he did not mind if the car went to the Chapter 7 Trustee. If the bankruptcy is filed and the lien is not properly recorded there could be some very harsh consequences to the debtor. This is the perfect example of why a person should not file a bankruptcy without an attorney.
Other Lien Issues to Consider
Another problem we see from time to time is a person that loaned the debtor money many years ago recording a lien immediately prior to the Bankruptcy filing. This is normally done with the debtor’s consent because the debtor either wants a lien on the property to eliminate unprotected equity; or the debtor wants this particular creditor to be paid. Either way, this may be a Preferential Transfer that must be disclosed on the Statement of Financial Affairs and may be avoided by the Chapter 7 Bankruptcy Trustee.
From time to time we will see where a family member paid cash for a car and then gave it to the debtor. The debtor is making payments on the car to the family member. The problem here is that the car is free and clear and in the debtor’s name. The Chapter 7 Bankruptcy Trustee will want to take the car and sell it for the benefit of the unsecured creditors. The family member will be an unsecured creditor and the debt to the family member will be discharged. Clearly, neither the family member that purchased the car, nor the debtor intended for the debt to be wiped out nor the car to be taken by the Bankruptcy Trustee, however, because they did not properly record the lien on the title, the car was taken. Had the family member recorded the lien against the car at the time he purchased the automobile for the debtor, assuming the loan was properly documented, then, the Bankruptcy Trustee would have no claim to the automobile.
When your bankruptcy attorney asks to see the DMV abstract of title, automobile loan pay off statement, Deed, Deed-of-Trust and mortgage payoff balance; he is doing so to verify that the liens are properly recorded. If liens are not properly recorded, that may cause him to give you different legal advice or take a different course of action.
Preparing bankruptcy schedules, especially if you have secured debts like houses and cars can be tricky. If you fail to properly fill out the forms and schedules you could easily lose your house or car. The attorneys at John W. Lee, PC have helped thousands of people file their bankruptcy and keep their valuable assets. We offer a free initial consultation to help you decide if bankruptcy is right for you.
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