A Chapter 7 bankruptcy allows you to liquidate your assets, use the proceeds to pay off your debts and discharge any nonexempt debts that remain. However, while a Chapter 7 bankruptcy can allow you to discharge debts, it does not remove any liens that may be in place on the discharged debt.
What a Lien Is
A lien is a charge against a property that a person or lender files to secure payment of a debt or obligation. For instance, if you borrow money using your car as collateral, your lender would have a lien against your vehicle. He does not own the vehicle or a part of it -- only an interest in the vehicle. A judicial lien is a lien that was obtained through a legal process. An example of a judicial lien could be that your credit card company takes you to court for nonpayment of $5,000; if you have a vehicle with $5,000 worth of equity in it, your credit card company could sue for a lien on your vehicle and, if you continue to not pay, it could repossess your car.
Liens and Bankruptcy
When you file a Chapter 7 bankruptcy, certain assets are exempted from liquidation. The exact value of the assets exempted and the types of assets included will vary by state, but in general you are allowed to keep a vehicle with a lower value (e.g. you may be able to keep a 5-year-old Camry but not a Bentley), household effects, your clothing and some of your furniture. Nonexempt assets are liquidated in an effort to cover your debts; the balance is discharged. However, while a Chapter 7 bankruptcy may discharge a debt, it does not discharge a lien.
After filing Chapter 7 bankruptcy, you could be in a situation where your debts are discharged but the liens are still in place. If this is the case, you should know which liens are avoidable and which you will have to act on. Avoidable liens are those that interfere with the exemptions provided you under the Chapter 7 bankruptcy code. For example, if the value of your vehicle qualifies it as an exemption, a lien against it, even a judicial lien, will not stand.
Motion to Avoid a Lien
All you have to do is prove that the property does qualify as an exemption and file a Motion to Avoid a Lien to that effect; your bankruptcy judge will then approve a complete lien avoidance or a partial lien avoidance depending on your personal circumstances. To file a Motion to Avoid a Lien, you will need to contact your bankruptcy attorney or your court-appointed bankruptcy trustee.