One of the things that I have seen cause confusion for my clients is the fact that the debt owed to the creditor and a lien created to secure the payment of the debt are not the same thing. Clients find it hard to absorb the concept that a debt can be discharged in bankruptcy but a lien can survive the discharge and continue to cause later problems. I can understand this. The client takes the brave step of seeking bankruptcy relief to resolve their problem and possibly discovers a lingering issue with a “lien” that does not necessarily go away upon obtaining a discharge in bankruptcy.
Difference Between Debt and Lien
This is how I explain the concept to my clients. A debt is created usually by the signing of a document obligating the client to repay money that is loaned to them. This debt could be unsecured, meaning it is basically borrowed on the client’s “signature.” Or this debt could be “secured” by either language contained in the contract, ie a purchase money security interest that is created because the money borrowed is being used to purchase an asset like a car, or by a separate document like a mortgage on real estate which secures the repayment of the debt when the money is borrowed to purchase the real estate. If the debt is “secured” by collateral, a lien has been created which is simply an agreement that if the money borrowed is not paid back, the creditor can instead take the property in order to satisfy the debt. The debt and the lien created are two separate entities that are inextricably intertwined. The “debt” can be discharged in bankruptcy but without further steps taken by a qualified bankruptcy attorney, the “lien” may survive the bankruptcy discharge.
One area where a lingering “lien” after a bankruptcy discharge rears its ugly head is in the form of a judgment lien. When a creditor files a lawsuit to collect a debt that is owed, and the court determines the creditor is owed the money, a judgment is entered against the borrower. If the creditor takes the certificate of judgment issued by the court and records it in the record room of any county in which the borrower owns property, a “judgment lien” has been created. This judgment lien attaches to any property owned by the borrower/debtor that is located in the county where the judgment lien is recorded. This includes real estate and personal property located within that county. Oftentimes a judgment lien can be eliminated during the bankruptcy by the filing of a motion to avoid the lien. However, there are circumstances where nothing can be done within the bankruptcy proceeding to get rid of the lien. An example is where there is value to real estate over and above any debt owed on the property. In that case, the judgment lien may attach to the equity and it may not be able to be avoided.
If a judgment lien survives the bankruptcy discharge it can often be a significant problem down the road when the owner wishes to sell or refinance a loan on the property. Even though the debt has absolutely been discharged, the creditor has you over a barrel because the “judgment lien” has survived. For this reason it is critical that you provide your bankruptcy attorney with any information regarding a recorded judgment lien. To do so, simply go to the record room in the Probate Judge’s Office for the county in which the property is located and perform a search under your name to discover if any recorded judgments against you exist. If you are aware of any possibility that you may have been sued on a debt in the past, it’s important to make this record room search part of your preparation for filing for bankruptcy relief.
Judgment liens can cause quite a problem when they show up down the road after receiving bankruptcy relief. In order to avoid this problem consult with a qualified bankruptcy attorney about your options at one of our locations nearest you in Alabama, Mississippi or Tennessee. The initial consultation is always free and confidential.