Any discussion of judgments and judgment liens is by necessity State specific. These are creatures of State law, and State law varies widely with respect to both judgments and judgment liens. Bankruptcy is governed by Federal law, but the Bankruptcy Code defers to State law frequently, and that is true with respect to how the Bankruptcy Code interacts with judgments and liens. So, always be sure you understand the underlying State law before assuming you understand anything about judgments, judgment liens or how they are affected by a Bankruptcy.
A Judgment is the result of a lawsuit. In a collection case the judgment will specify the amount of money that the Defendant owes to the Plaintiff. A judgment creates a lien when it is recorded in County records and attaches to a piece of property. In Oklahoma judgment liens can only attach to real property (i.e., land). Tax liens (which arise by Statute rather than as the result of a lawsuit) can, and do, attach to anything owned by the Debtor. What a lien does is it gives the lienholder special rights to get paid from the proceeds if and when the property to which the lien is attached is sold.
Some liens can be foreclosed by the lien holder. Some liens cannot be. If the lien can be foreclosed, then the judgment creditor (or lien holder) can effectively force the sale of the property so that its lien can be satisfied from the sales proceeds. If a lien cannot be foreclosed, for instance, a judgment lien attached to the judgment debtor’s homestead; then, the lien holder can only sit back and hope that the debtor chooses to sell the property. At that point, assuming that the lien is still viable, the judgment creditor is entitled to be paid out of the sales proceeds.
A Bankruptcy filing does affects judgments and liens in a number of ways. First of all, if a lawsuit has been filed, but the judgment has not yet been entered; a Bankruptcy filing will stay the lawsuit and prohibit the entry of the judgment. If the judgment has already been taken but not yet recorded, the recording of the judgment will be stayed by the bankruptcy filing.
More generally, by the time the bankruptcy is filed the judgment has already been taken and recorded. At that point if the Debtor owns real estate in the County in which the judgment was recorded, then the judgment has created a lien on the real estate. If the Debtor does not own real estate in the County in which the judgment has been recorded, then no lien has been created. This is a point that countless title attorneys miss.
Once a judgment has been recorded on real estate it can be removed in a Bankruptcy if the real estate it is attached to is exempt, which generally means the debtor’s homestead; and if the lien impairs the homestead exemption. In most cases in Oklahoma a judgment lien will always impair the exemption if it is attached to a homestead. That is certainly not the case in other States, and there are exceptions in Oklahoma, especially if the Debtor used exemptions other than Oklahoma’s State law exemptions when filing the Bankruptcy.
That does not mean, however, that filing a Bankruptcy automatically removes judgment liens from your homestead. First, a motion to avoid the lien must be filed. The motion must be served on the judgment credtior, among others; and that motion must be granted. The vast majority of such motions are granted, and in many cases obtaining good service is the hardest part of the process. Still, if it isn’t done and the order doesn’t issue, then the motion will remain attached to the debtor’s homestead. Oh, and when this Order issues, make sure it is recorded in County records where future title attorneys can find it.
The first problem arises when this isn’t done, the bankruptcy is discharged, and the case closes. This generally happens, because either the Debtor didn’t tell the bankruptcy attorney about the judgment or didn’t pay for the additional work necessary to have the lien avoided. In this case, it is generally possible to reopen the Bankruptcy case to avoid the lien. This is substantially more expensive than doing it when the case is still open. It also gives the judgment creditor an extra argument that the motion to avoid should not be granted. However, these motions are still generally successful. The biggest problem here is that the home owner generally finds out about the judgment lien when trying to close a sale of the house. The time necessary to reopen the case, give notice to all creditors, have a trustee reappointed, file the motion, get proper service o the creditor, and get the order entered frequently means that the buyer has lost interest and moved on.
The other possible problem is that the title company’s title attorney doesn’t understand the effect of a Bankruptcy discharge. Yes, this is really a problem. Here is the most common scenario. A couple files for Bankruptcy. They do NOT own any real estate at the time. There are judgments against them, but they are not liens; because there is no real estate for them to attach to. The Debtors’ bankruptcy attorney correctly does not file motions to avoid the judgment liens, because you cannot avoid a lien that doesn’t exist. The case discharges and closes. Several years later the Debtors decide to buy a house. The title company won’t issue title insurance, because the judgment liens (that don’t exist) weren’t properly avoided in their Bankruptcy. In other words the title company basically tells these people that their bankruptcy lawyer screwed up and now they will never be able to buy a house, because these pre-bankruptcy judgments will attach to any real estate they buy – ever (or until the judgments expire).
I really hate getting these phone calls.
Ok. Here is the skinny. Section 524 of the United States Bankruptcy Code says:
(a) A discharge in a case under this title –
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
That is pretty much the last word on this issue. Once a discharge is entered, and the debtor’s liability for the underlying debt is discharged; the judgment is VOID – not voidable, not weakened, not asleep. It is dead. Dead judgments cannot attach to after-acquired property.
Elaine