Individuals who need help getting out of debt have the option of declaring Chapter 13 bankruptcy. Once Chapter 13 is approved by a court, it offers certain protections to the individual against collection efforts by creditors. In some cases, the debtor can protect himself even further by filing a motion to avoid a lien.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a legal debt relief program offered to individual consumers. It is used particularly for individuals who have steady incomes but got too far into debt to handle the debt load. In Chapter 13, a bankruptcy trustee works with creditors to restructure the debt load so that the individual can make a single affordable debt payment each month that then gets distributed proportionally to the creditors. Chapter 13 bankruptcy, unlike Chapter 7 bankruptcy, does not erase the person's debt; it simply restructures it so the individual can repay it in a three- to five-year period.
Liens
A lien is a legal document a creditor uses to secure a debt. Liens are placed against an individual's assets, often property, and remain in place until the debt is retired. Liens can be placed by statute (in the case of tax debt) or by court order. Liens can be stripped or avoided under certain circumstances as part of a Chapter 13 debt restructuring plan.
Lien Stripping
Stripping a lien means dividing it into secured and unsecured portions. For instance, if a creditor is awarded a lien on a property for $75,000 and the property's value drops to $60,000, only $60,000 of the debt is now secured. Under Chapter 13 restructuring, the lien becomes $60,000 rather than its original $75,000. The remaining $15,000 s now considered unsecured debt.
Motion to Avoid
Once a lien has been stripped, the creditor may try to secure it with a new lien on a different asset. In order to stop this from happening, the debtor may file a motion to avoid, which will stop a new lien being placed for the stripped amount of unsecured debt. However, a motion to avoid can only be filed for judicial liens. A statutory lien will never be stripped, so it is not possible to file a motion to avoid a government-placed lien.
Other Considerations
Only judicial liens that were in force before a Chapter 13 restructuring plan was approved can be avoided. Liens to secure new debt incurred after Chapter 13 approval are not protected by Chapter 13.
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