When Judgment Liens Stick...and When They Don't
There are two kinds of creditors – those whose loans are built on sand and those whose loans are built on rock. We usually call these “secured” or “unsecured” creditors, but sometimes it’s helpful to think of them in more colorful language. When a credit card company sues a debtor, they are, in effect, trying to drag their loan from the sand up on to a rock. They want to be secure and through the process of suing a debtor, the law obliges. When an unsecured creditor obtains a judgment against a defendant debtor, he makes himself secured and all of the non-exempt assets of a debtor that are located in the county where the judgment is entered suddenly become collateral for the underlying debt – subject, that is, to the very kind of repossession that a vehicle finance company or mortgage company enjoys. In some circumstances, a bankruptcy case can help a debtor shove a judgment creditor back off the rock onto the unsecured sand. While first mortgages and deeds of trust are nearly always immovable and subordinate mortgages and deeds of trust are movable only when a home is worth less than the loan balance of the prior recorded deeds of trust, judgment liens are much more vulnerable. Under 11 USC 522(f), a debtor in either chapter 7 or chapter 13 can avoid a judgment lien to the extent that the lien impairs a debtor’s exemption. In North Carolina, individuals are entitled to exempt $35,000 worth of equity in their residence. If a judgment lien encroaches on your $35,000 of equity, a bankruptcy case can push it right back off the rock. This changes pre-bankruptcy strategy. If you are getting sued, but have less than $35,000 of equity in your home, there is no need to file a bankruptcy case before the judgment is entered. If you have more than $35,000 of equity in your home, it is important to file bankruptcy before the judgment is entered in state court.