LIEN AVOIDANCE DOES NOT REQUIRE EXEMPTION CLAIM

After a judgment is obtained, the next step is to enforce the judgment against the debtor’s assets. The creditor who has obtained a judgment against debtor will have to apply for an involuntary lien against the assets of the debtor. When the notice of involuntary lien is issued, that has to be recorded with the recorder’s office. The act of recording creates a judicial or involuntary lien against the debtor’s assets located in the county where the lien is recorded. Can debtor who files for bankruptcy relief avoid or cancel a judicial lien that has attached to his residence? The answer is YES. However, the lien must impair an exemption for it to be avoidable. To illustrate, debtor owns his residence with a fair market value of $100,000. He owes a mortgage of $50,000. Last month, the hospital that provided him chemotherapy treatment for his cancer obtained a judgment and a judicial lien on his residence for $200,000. Can debtor avoid or cancel the judicial lien for $200,000? The answer is YES.

The authority for judicial lien avoidance is Section 522 (f) of the bankruptcy code. It states that, “Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may AVOID the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled…” So, clearly, debtor can avoid a judicial lien if it impairs an exemption that he is entitled to. The question is: Is debtor required by law to claim property as exempt in order to avoid judicial liens pursuant to 522 (f)? In the example above, if debtor did not claim his homestead as exempt in his bankruptcy petition, can he still avoid the judicial lien of $200,000 filed by hospital? Or, must debtor claim his homestead as exempt property so that he can avoid the lien?

 In Re Botkin, the Chapter 7 debtor’s home was worth $22,500 and subject to a mortgage of $24,124. Her residence had a judicial lien of $9,800 held by Du Pont Community Credit Union. Under Virginia law, she was entitled to exempt up to $5,500 for her equity in her residence. But she did not claim an exemption for any portion of her residence because she had no equity in the property. After the meeting of creditors was concluded, the debtor asked the court to avoid the judicial lien pursuant to 522 (f). The bankruptcy court denied the request because the debtor failed to claim an exemption in her residence. The district court reversed and remanded, concluding that the Bankruptcy Code does not require a debtor to actually claim an exemption in the property subject to the judicial lien to be avoided. Although DuPont did not respond to the debtor’s motion, the credit union appealed the district court’s ruling. The 4th Circuit affirmed, stating that the Supreme Court’s decision in Owen v. Owen was instructive. In Owen, the Court said, “To determine the application of Section 522 (f) (court) ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he WOULD HAVE BEEN entitled but for the lien itself.”

 Subsequent to Owen, Section 522 (f) was amended to add a mathematical test for determining whether a judicial lien impaired an exemption. “Importantly, one of the components is “the amount of the exemption that the debtor COULD CLAIM if there were no liens on the property,” the court said further. In conclusion, the court said that “As was the case with the statutory language on which Owen relied, this language reflects Section 522’s focus not on any actual claim of exemption, but rather on the hypothetical exemption that the debtor would have been entitled to in the absence of the lien.”

Hence, debtors do not have to claim property as exempt in order to avoid judicial liens.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.