What Happens to a Property Lien in Bankruptcy?

When you don't pay certain bills, the creditors can get a judgment against you and a property lien may be placed on your house. If this occurs, the lien may be used as the legal means to sell or retain the property in order to recover the funds that the debtor obtained through the loan. However when the debtor files for either Chapter 13 or Chapter 7 bankruptcy, the power of a creditor lien is changed so that the court may accurately process the bankruptcy first. Depending on the type of property the creditor has the lien on, a successful bankruptcy being filed could negate the lien altogether if the debtor handles the situation correctly.  

Bankruptcy Filing and Property Liens

For the most part, a bankruptcy filing is simply a means of prolonging the inevitable.

• Even a successful bankruptcy discharge won’t remove a lien a creditor has on a property, rather it will only put the lien on hold while the bankruptcy case is processed. 
• The creditor will still be legally allowed to recover the property for sale as collateral as a means of satisfying the debt that was agreed to by the debtor- they will simply have to wait until all of the other debts have been processed or discharged through the bankruptcy and the bankruptcy case has been closed. 
• The only way a debtor can manage to avoid having the creditor reclaim the collateral property is to redeem the property by satisfying the balance due to the creditor, or to reaffirm the terms of the original debt. This can only be done when the terms are legally agreed upon between both the creditor and the debtor, which is very difficult to achieve. 
• If either of these actions cannot be successfully carried out, the debtor will only have the option of surrendering the collateral property to the creditor through foreclosure for resale of the property.  

How Chapter 13 could Help 

There could be one way filing for bankruptcy with a lien on a debtor’s property may save it, but only through a Chapter 13 filing. Chapter 13 bankruptcy provides for an installment plan being set by the court so that all creditors that are mentioned in the bankruptcy are repaid by the debtor through the repayment plan.  

Getting Help

Bankruptcy in general can be a complicated process to endure, and it is only made more complicated if any of the assets in the bankruptcy have a lien applied. As such, anyone who falls into these circumstances should immediately consult with a professional bankruptcy attorney.