Black letter law says liens pass through bankruptcy unchanged. But the better statement adds a single word: unless.
Liens survive bankruptcy intact unless….unless you take some action to void them.
One tool to void liens lives in §522(f). Its location in Chapter 5 tells you that it’s available to any individual debtor who is entitled to claim exemptions.
The more you know about the tool, the better you can use it. So let’s play 20 questions on avoiding liens that impair exemptions.
1. Is it the debtor’s property?
To be subject to avoidance, the lien must attach to the debtor’s interest in property.
That interest might be
Joint tenancy: Pagnini, 433 B.R. 455 (1st. Cir. BAP 2010)
Community property: All of the community property comes into the estate, even if only one spouse files. §541(a)(2). Schmiedel, 236 B.R. 393 ( Bankr. E.D. Wis. 1999).
Tenancy by entireties: debtor’s interest in property is the entire
property. Levinson, 395 B.R. 554 (D. E.D. NY 2008) ; but see only one
half of the property subject to lien avoidance. Raskin, 505 B.R. 684
(Bankr. D. Md. 2014).
2. Did the debtor’s interest exist before the lien fixed?
Statutory language that avoids the fixing of a lien on an interest of the debtor in property prevents stripping liens that fix simultaneously with the debtor’s acquisition of that interest in property.
Farrey v. Sanderfoot, 500 U.S. 291 (1991)
Weeks v. Pederson, 230 B.R. 158 (9th Cir. BAP 1999)
3. Is the lien one that can be avoided?
Only judicial liens can be avoided under §522(f).
Tax liens are statutory and not avoidable as impairing an exemption; Frengel, 115 B.R. 569 (Bankr. N.D. Ohio 1989)
DSO lien is not avoidable: Nevette, 227 B.R. 724 (Bankr. E.D. Mo. 1998) Attorneys charging lien is statutory: Washington, 242 F.3d 1320(11th Cir. 2001)
Purchase money: refinancing purchase money lien makes new lien nonpurchase money. Freeman, 956 F.2d 252 (11th Cir. 1992); contra: Billings, 838 F.2d 405 (10th Cir. 1988).
Lien for nondischargeable judgment avoidable: Vaughan, 311 B.R.
573 (10th Cir. BAP, 2004).
4. Which exemptions apply?
Federal bankruptcy exemptions are available unless state law provides otherwise. §522(b)(2).
Section 522(b)(3) looks to the debtor’s domicile in the 730 days before the commencement of the case to
determine which state law applies.
If the state whose laws apply isn’t the debtor’s current domicile, you must then determine whether the exemptions of the state providing the exemption law are available to individuals who are not current domiciliaries.
Put another way, you need to determine if the exemptions in question are extra-territorial. For this exercise, nothing beats John Bates’ comprehensive, state by state analysis of exemptions, ExemptionsExpress. Access is now a membership benefit of NACBA.
If no state’s exemptions are available to the debtor, the debtor may claim the bankruptcy exemptions of §522(d).
The right to avoid a judicial lien preempts state exemption law to the contrary. Henderson, 18 F.3d 1305 (5th Cir. 1994).
Do you need to claim everything exempt?
Property that is not property of the estate need not be exempted; Sewell, 180 F.3d 707 (5th Cir. 2001); it follows that judicial liens on such property can’t be avoided.
5. Must the debtor have actually claimed an exemption?
Well…
Yes: Wallace, 453 B.R. 78 (Bankr. W.D. NY 2011)
No: Bodkin 650 F.3d 396 (4th Cir. 2011)
6. Can you amend exemptions in order to avoid lien?
Does the policy of freely amending exemptions extend beyond case closing where the debtor seeks to avoid a lien.
Yes: Goswami, 304 B.R. 386 (9th Cir. BAP 2003); Dickson (Bankr.ND Ill. 2014);
No: Bartlett, 326 B.R. 436 (Bankr. N.D. Ind. 2005)
Note that in exemption contests, FRBP 4003 allocates the burden of proof on objections to claims of
exemption to the objecting party.
7. Can a lien creditor challenge validity of exemption in avoidance motion if it was earlier allowed?
Yes: Morgan,149 B.R. 147 (9th Cir. BAP 1993); Maylin,
155 B.R. 605 (Bankr. Maine 1993)
No: United States v. Williams, 156 B.R. 77 (Bankr. S.D. Ala 1993).
But see FRBP 4003(d) “not withstanding the provision of subdivision (b), a creditor may object to a motion filed under §522(f) by challenging the validity of the exemption asserted to be impaired by the lien.”
8. Does the lien impair an exemption?
The statute provides a formula that subtracts the lien in question, other unavoidable liens on the debtor’s interest and the debtor’s exemption from the value of the debtor’s interest.
If the result is zero or a negative number, the lien impairs the exemption. If it’s a positive number, the value of the asset is sufficient such that the exemption is not impaired.
Junior-most liens are avoided first. Hanger, 217 B.R. 592 ( 9th Cir.B.A.P. 1997) , aff’d, 196 F.3d 1292 (9th Cir. 1999) ; Heaney, 453 B.R. 42 (Bankr. E.D.N.Y. 2011)
9. How do you count senior liens where others have an interest in the property?
Total of liens deducted from debtor’s one half of property value to determine impairment: Cozad, 208 B.R. 495 (10th Cir. BAP 1997).
OR
Total of liens senior to lien to be avoided deducted from total value of co owned property to calculate value of debtor’s interest. Lehman,205 F.3d 1255 (11th Cir. 2000).
10. Who has burden of proof on motion to avoid?
Debtor bears the burden on all elements of lien avoidance. Soost, 262 B.R. 68 ( 8th Cr. BAP 2001).
But what if the issue is whether the exemption is allowable? The debtor bears burden of showing that an
exemption was claimed; any contest as to whether the exemption was proper shifts to the objecting creditor. Thompson, 263 B.R. 134. (Bankr. WD Okla 2001).
11. Is avoidance dependent on equity in the property?
The 1994 amendments to 522(f) attempted to provide a formula for calculating “impairment” that made clear that the debtor did not have to have equity in the property in order to avoid a lien. See Thigpen, 374 B.R. 374 (Bankr. S.D. GA 2007). Freeman, 259 B.R. 104 ( Bankr. D.SC 2001).
Some arguments persist that equity is a requirement of a state law exemption that then bars debtor from avoiding lien.
12. Can you bring avoidance motion after case closes?
You bet.
After case closing: Green, 2013 WL 4055846 (BAP 9th Cir. 2013)
After sale of liened property: Chiu, 304 F.3d 905 (9th Cir. 2002)
After payment of lien: Wilding, 475 F.3d 428 (1st Cir. 2007)
Abandonment doesn’t cut off jurisdiction: Ramos, 498 BR 1 (BAP 1st
Cir. 2013)
13. Can you wait too long to avoid the lien?
Yes, principles of equity, including a detrimental change of position, may defeat a long delayed motion to avoid lien. Bianucci, 4 F.3d 526 (7th Cir. 2004).
14. What is the proper date for valuation?
Asset is valued as of the filing of the petition. Rehbein, 49 B.R. 250, (Bankr. D. Mass 1985).
Unless, the case is converted from 13 to 7, at which point the date of conversion is the relevant date. Salamone, 46 B.R. 19 ( Bankr. E.D. NY 1984).
And the debtor as owner is competent to opine as to the value the property. Saucier, 353 B.R. 383 (Bankr. D. Conn. 2006)
15. Do costs of sale matter?
No, costs of sale are not part of the statutory formula for measuring impairment. Wolmer, 494 B.R. 783 (Bankr. D. Conn. 2013).
The relevant measure of value is what a willing buyer would give a willing seller, not a forced-sale value. James, 75 B.R. 124 (Bankr. S.D Ohio 1987)
16. What does the partially avoided lien look like afterwards?
Lien is avoided only to the extent that it impairs the exemption. Therefore, some part of the lien may survive.
Nelson v. Scala, 192 F.3d 32 ( 1st Cir. 1999); Falvo, 227 B.R. 662 (BAP 6th Cir. 1998)
17. Did you forget 522(h)?
Subsection h allows the debtor to avoid a transfer and claim exempt property involuntarily transferred to a creditor when the trustee elects not to avoid the transfer. McCarthy, 501 B.R. 89(BAP 8th 2013).
Defenses that are good against trustee are good against debtor Sandoval, 470 BR 195 (Bankr. D.N.M. 2012); Maus, 282 B.R. 836 (Bankr. N.D. Ohio 2002); Pierce, 504 B.R .506 (BAP 8th 2014).
18. Does lien avoidance depend on getting a discharge?
Who knows? The building consensus that mortgage lien stripping in Chapter 20 cases is permissible, one must ask what the role the discharge plays in §522 lien avoidance.
Grab your tools
So, for every secured claim that appears on your schedules, consider whether you have a tool to avoid or bifurcate that lien. And consider the possibility that your client doesn’t know or hasn’t told you about all of the liens out there. A pre filing title search may be cheaper than reopening the case later on.
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Rescuing your client’s exemption
