Chapter 7 liquidation bankruptcies are the most common type of bankruptcy proceeding in the United States. One of the most powerful tools for achieving a truly fresh start in bankruptcy is the debtor’s power to avoid certain liens on the debtor’s assets
A lien is an interest of a creditor or other entity in a specific piece of a debtor’s property. Certain types of liens may be avoided through a chapter 7 bankruptcy proceeding. To qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, a corporation or other business entity. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) limited the ability of debtors to avoid liens through bankruptcy proceedings. The BAPCPA limited the types and quantities of exempt household goods on which debtors could avoid certain liens. For example, the definition of “household goods” was changed limiting “electronic equipment” to one radio, one television, one VCR, and one personal computer with related equipment. The definition now excludes works of art not created by the debtor or a relative of the debtor, and jewelry worth more than $500 (except wedding rings).
Although, a Chapter 7 bankruptcy can eliminate liability for some debts, it doesn’t eliminate any liens on property unless the required steps are taken to reduce or eliminate those liens. Some liens may be avoided simply by surrendering property or making payments to the creditor.
The procedure for surrendering property, includes listing that property on the bankruptcy form entitled “Statement of Intentions” and sending a copy to the creditor within 45 days of the bankruptcy filing date. The creditor must take possession of the property within 30 days of the creditors’ meeting; otherwise the property will be considered abandoned, and the property will be free of any debt or liens. Although, this is an effective method of eliminating liens on property one should also be prepared to lose it.
Redemption is another method for avoiding liens. This can be done by paying the creditor the worth of the property and not the entire amount owed on debt. Redemption may be invoked only if: a) the property was kept as a security for a consumer loan and not a business loan; and b) the property is tangible property. It can’t be real estate or stocks or bonds.
A type of secured debt owed by the debtor is judicial lien. This lien can be avoided by filing a motion to avoid judicial lien by a debtor in either a Chapter 7 or Chapter 13 bankruptcy proceeding.