Can Filing for Bankruptcy in Georgia Extinguish a Lien?

One of the most common questions that my clients in my Atlanta, Georgia bankruptcy practice ask is whether bankruptcy can extinguish a lien. You may wonder what exactly is a lien? A lien is a legal claim against property based on a debt. For example, a mortgage company takes an interest in a borrower’s house with a security deed, which is a type of lien on the property. There are many other types of liens, including judgment liens, mechanic’s liens, and tax liens. Bankruptcy can only extinguish certain types of liens: judgment liens and liens against household items.

Bankruptcy can extinguish judgment liens, subject to some exceptions. Many debtors file bankruptcy because a creditor has a judgment against them and is garnishing their wages or checking accounts. Most likely, the creditor has also filed a lien that is known as a writ of fieri facias (“Fi.Fa”) or a judgment lien on the real estate docket. Pursuant to 11 U.S.C. Section 522, which is part of the bankruptcy law, a debtor can file bankruptcy and ask the court to “avoid” or wipe out a judgment lien. The law is somewhat complex with regard to the riddance of a judgment lien and requires a lesson about bankruptcy exemptions.

In both Chapter 7 and Chapter 13 bankruptcies, debtors are allowed to protect a portion of their assets by using “exemptions.” Each state, including Georgia, has its own exemptions but can also choose to use federal exemptions. Georgia bankruptcy filers must use Georgia exemptions. A Fi.Fa that is filed in Georgia attaches to all personal and real property that the debtor owns in Georgia. Thus, the judgment lien can be used to levy property, such as a car, or foreclose on a piece of real property. Under the bankruptcy code, a debtor may avoid that lien to the extent that his or her property is exempt. For example, if a debtor owns a car that worth $3500.00 and claims an exemption of the full $3,500.00 on his bankruptcy petition, then the judgment lien cannot attach to that car. On the other hand, if the car is worth $10,000.00, then the creditor cannot touch the $3,500.00 exempt portion but can exercise its right to levy the car pursuant to the lien for the unexempt amount–in this case, $6,500.00.

The lien avoidance statute under bankruptcy law does not apply to non-judicial liens such as tax liens or mechanic and materialman liens. However, a debtor can avoid liens created by loans secured by household goods. The avoidance of such liens is only possible where the debtor did not borrow the money and purchase the goods at the same time. For example, where a debtor financed furniture or electronics and opened a store credit card to purchase those goods, any security interest or liens on the purchased goods are not avoidable. On the other hand, where a debtor borrows money and lists goods that he or she already owns to get the loan, the lien is avoidable.

If your property is encumbered by liens and you are considering filing for bankruptcy, please seek the advice of a qualified attorney in order to obtain proper legal protection for your assets. For a free consultation please contact the Law Offices of Charles Clapp at 404.585.0040 or email info@lawcmc.com.