If you take on debt, it may be secured by the creditor by something called a lien. In this article, we’ll define the term “lien” and explain how liens are affected by bankruptcy proceedings. 

Key Takeaways

• A lien is an interest or claim to a property used as a type of collateral to protect creditors
• With a lien, a creditor can seize and sell a property to offset unpaid debts 
• When a person files for bankruptcy, most liens stay in place
• Bankrupt debtors have the option of filing to have certain types of eligible liens removed

What Is a Lien?

A lien is a security interest, legal right, or claim against an asset or property that is typically used by creditors as a type of collateral. Liens can be put in place by financial institutions, governments, and small businesses. 

The goal of a lien is to guarantee an obligation such as the repayment of a loan. Liens usually stay in effect until the obligation to the creditor is satisfied. If the obligation is never satisfied, the creditor may be able to take possession of and sell the property. A property owner cannot sell a property that is the subject of a lien without the consent of the lien owner.

Liens can be voluntary, such as liens on property for a loan. They can also be involuntary if a creditor seeks legal action for nonpayment of debt.

Types of Liens

There are many types of liens including:

• Agricultural lien
• Common law lien
• Statutory lien
• Contractual lien
• Maritime lien
• Legal lien
• Equitable lien
• Bank lien
• Real estate lien
• Tax lien

Liens in Bankruptcy Law

When a person files for Chapter 7 bankruptcy, they are freed of many of their debts. In exchange, many of their assets are placed into a bankruptcy trust that can be sold off to repay creditors.

As such, Chapter 7 bankruptcy can clear a person’s responsibility to pay a debt with a lien on it such as a mortgage. However, they will not be able to keep the collateral unless they pay what they owe. 

Essentially, filing for bankruptcy wipes out a person’s liability for a debt. This means the creditor cannot later sue the individual to collect the debt and use a judicial lien to garnish their wages. 

However, the creditor does have the right to offset the money they are owed by selling the collateral securing the debt. With a lien, the creditor can seize the property and sell it. If for whatever reason the property is unavailable, they can sue the debtor for the value of the collateral. 

So, for example, while a bankrupt debtor may no longer be obligated to pay the rest of their mortgage, the bank can still seize their house if they do not pay. 

That being said, a debtor has the option of filing a motion or lawsuit asking to have a lien removed. Whether or not the motion will be successful depends on a number of factors including:

• The type of lien
• The value of the property
• When the debtor purchased the property
• The type of bankruptcy filed
• If the lien is on an exempt property

The type of liens most likely to be removed are:

• Judicial liens arising out of court judgments
• Liens on exempt assets such as household goods, clothing, and tools of the trade