Using Bankruptcy to Remove Judgements & Liens from Real Estate
by Steven R. Neuner, Esq.
Frequently, people in financial difficulty have been sued and have had judgments entered against them. They may also have unpaid taxes, resulting in the filing of federal tax liens (or its equivalent for the State of New Jersey, the Certificate of Debt). Later, when they want to sell or refinance their home, these come up on a title search, and unless something is done they will need to be paid. Many people think that a bankruptcy will, by itself, remove all these liens. This is not so, and further action is needed. This Article discusses when and how these liens can be removed through Bankruptcy.
A successful bankruptcy of an individual results in a discharge order. This discharge eliminates the individual’s personal liability to repay unsecured debts. However, the Discharge in Bankruptcy does not automatically remove judgments or other liens. To varying degrees, the judgments or liens can be removed (the technical term is “avoided”), using the discharge or in some cases, by sales put through while the bankruptcy case is open. This article will briefly discuss how this can be done.
Important at the outset is to understand the differences between the three types of liens: (a) judgments or judicial liens , which result from a lawsuit by a creditor. In New Jersey, once these judgments are docketed in the Superior Court, they become liens on real estate; (b) statutory liens, the most common example of which IRS or state tax liens, and property tax liens, and (c) consensual liens such as mortgages.
Mortgages or other consensual liens must be paid off and satisfied, and in most instances cannot otherwise be removed from the property. A bankruptcy discharge eliminates only the borrower’s personal obligation, but the mortgage or other lien remains attached to the property. This assumes the mortgage had been properly recorded, was valid when filed.
IRS tax liens or State of New Jersey tax liens (which show up on a judgment search as Certificates of Debt) generally must also be paid off and satisfied at settlement. A question may arise what amount is properly due and this should be carefully examined to make sure the amount is correct. In particular, it may be possible in a sale through the bankruptcy court to avoid the portion of the lien which is for penalties, taking advantage of Bankruptcy Code provisions that state penalties are not part of a valid lien. If the bankruptcy case is still open, these issues can be resolved by the Bankruptcy Court. However, careful attention must be paid to certain time limitations, especially where a refund is being sought.
With these types of tax liens, it is possible given the right circumstances to remove them from the property without having to pay them in full. One way this is accomplished by a sale by a Bankruptcy Trustee or Debtor in Possession in and through the bankruptcy. The issues involved in successfully achieving these results are complicated. For example, if the bankruptcy is completed, the property “abandoned” or a discharge granted, this opportunity may well be lost. Anyone facing substantial tax liens, especially with significant penalties, should consult with competent and experienced bankruptcy counsel to discuss these options and alternatives.
By contrast, judgments are much easier to remove from a piece of real estate, depending on the amount of equity in it and the particular circumstances. This is usually something that comes up long after a bankruptcy, when the debtors want to sell or refinance the home and the judgments come up on a title search. There are two ways to remove them. The first is by a “lien avoidance” motion in the Bankruptcy Court. Under this procedure, judgment liens are avoided to the extent that equity remaining after all the mortgages, taxes and judgments is less than what the debtors are entitled to exempt. Currently this exemption is $20,200.00 per person and can be as high as $42,500.00 for a husband and wife. These motions should generally be brought before the bankruptcy case is closed, although the bankruptcy case can be reopened in many cases. It will be important to establish the payoff balances on all mortgages on the property, to obtain a accurate and current judgment search and to get proof of the current market value of the property. In most cases, if this is provided, the motion will usually be uncontested. In most instances, unless the equity in the property is more than the exempt amount, the judgments will be completely removed by an Order of the Bankruptcy Court which can then be recorded or brought to settlement.
Another way to remove judgments is available a year after a bankruptcy. In New Jersey, at any time more than one year after a person has received a Discharge in Bankruptcy, that person can file a motion in the Superior Court, in the county or counties where judgment was originally entered, to remove judgment liens from the property. Under current case law, this method may be preferable. First, you need not go back to the Bankruptcy Court or reopen a bankruptcy case if it was closed. Secondly, the avoidance of the judgment is complete without regard to the value of the real estate.
Either way, the result is that clear title can be conveyed without the Sellers having to pay off the judgments. Anyone hoping to sell or refinance a home, and any real estate broker assisting them should be attuned to these issues. Brokers are well advised, whenever a seller appears to be in financial difficulty (or had a previous bankruptcy) to question the Seller or even order an early judgment search. If judgments appear, consulting with competent and experienced bankruptcy counsel will avoid needless delay and possible loss of a Buyer or a refinancing opportunity.
Removing judgments or liens can free up money for Sellers. Anyone considering selling real estate where they will have to bring money to the settlement table to payoff judgments or tax liens should seriously consider the alternative of a bankruptcy. Properly handled, a bankruptcy can result, in many cases, with the sellers leaving the settlement table with cash in hand.
Please note that there are other circumstances which may interfere with an ability to remove judgments. When a creditor is attempting to collect a judgment through a sheriff’s levy of any property, the ability to remove judgmens can be easily and quickly lost.
We invite inquiries from real estate brokers or interested parties.