Liens Eligible for Elimination

April 13, 2006

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When battling liens against you, the types of liens on exempt assets that can be eliminated depend, to some degree, on whether you are involved in a state court proceeding or a bankruptcy proceeding. The general rule is that, in either proceeding, only judgment liens against exempt property can be eliminated. However, even certain judgment liens cannot be eliminated.

More specifically, the following rules and exceptions tend to apply across the states and in bankruptcy proceedings:

Judgment liens usually cannot be eliminated when these liens are for any of these situations:
- alimony or child support
- an order of restitution based on a criminal case
- a judgment based on a prior consensual lien(e.g., a mortgage) or a prior statutory lien (e.g., a tax lien).
Consensual liens and statutory liens on exempt property usually cannot be eliminated at all. This category includes purchase-money security interest liens, non-purchase-money security interest liens, mechanic's liens, and tax liens. Examples of liens from this category include first mortgages, second mortgages and home refinancings; car loans; loans for the purchase of supplies, office equipment, etc., where the assets purchased are put up as collateral for the loan; and delinquent property, income and estate taxes. Clearly, this category is very broad. Here, as a general rule, an asset exemption will be of no value, to the extent of these liens. However, there are exceptions that can invalidate a lien.

The final step in lien elimination is to calculate whether the amount of a lien actually impairs an exemption.

State Laws. It is surprising that most states do not expressly describe, by statute, the types of liens that can be eliminated in state court when the liens impair an exemption, as this is obviously such an important issue.

North Carolina is one of the few states that do provide clear-cut rules by statute. Other states, which typically do not have such express provisions, usually rely on court decisions, coupled with limited statutory provisions, to define the types of liens that can be eliminated. The general rules we've outlined above are usually good guidelines.

However, in a few states, the courts may have developed narrow exceptions to the general rules. For example, Alabama courts have ruled that a judicial lien arising from a tort judgment cannot be eliminated. While an exception such as this will be rare, you should still be aware that, due to the vagaries of the law in each state, exceptions may exist in a few instances.

Bankruptcy Laws. Generally, the bankruptcy code follows the rules described above for eliminating liens that impair exempt assets. In addition, however, the code allows for the elimination of certain liens that impair exempt property that cannot be eliminated in a state court proceeding.

Warning

If you face any type of lien, don't automatically assume it can or cannot be eliminated. Always consult an attorney. In rare instances, an exception may exist to the rules discussed above that will not allow lien elimination in your particular state.

On the other hand, sometimes an argument can be made that will allow lien elimination when it first appeared that this was not possible.