When you take out a mortgage, home equity loan, or home equity line of credit on your home or on another piece of property, you grant the lender a lien on that property. The lien allows the lender to foreclose and sell the property if you fall behind in your obligations under the loan. Bankruptcy, though, can help to stall or even prevent foreclosure. When insolvency prevents foreclosure, this can be called avoiding the lien.
When you take out a home mortgage or home equity loan, you actually create two independent legal obligations. The first responsibility is a private obligation from you to the lending company. You personally promise to pay back the loan. The second obligation is that the lien you give the lender for a security interest in the property. The lien is a right of the lender to waive, and it is separate from your personal obligation under the loan.
When you file for bankruptcy, you automatically eliminate your individual liability on the home loan. This indicates you are no longer legally required to pay off the loan. But, just because your personal liability is discharged, this does not remove the lien in your property. So, if you are out of bankruptcy and opt not to pay back the loan because you’ve got no private obligation, it’s still true that you could lose the home to foreclosure if the lender moves its lien rights.
You can avoid a lien in bankruptcy. When you avoid a lien it implies you remove the lien as well as eliminating your personal liability on the loan. To put it differently, you can dismiss the loan without danger of losing your premises.
You have to obtain approval from the bankruptcy court in order to avoid a lien in your property. The only way to steer clear of a mortgage lien would be to prove that the worth of your property is significantly less than the value of this lien, and that you’re entitled to an exemption for the value of their property. Back in California, the homestead exemption for property is $50,00 for individuals, $75,000 for families, and $150,000 for individuals age 65 and older. Since most land in California is worth more than the exemption amount, it is very rare for a California bankruptcy filer to qualify for mortgage lien avoidance.
Another way to avert the ramifications of a lien foreclosure after bankruptcy would be to reinstate your mortgage loan by agreeing with your lender to waive your right to release your personal liability. Essentially, you just agree with the lender that for purposes of the mortgage loan you will pretend the insolvency never happened. This will let you keep the property without fear of foreclosure, but naturally you will have to stay present with all the obligations. The reason why you reinstate your personal obligation is because most lenders have the right to waive their lien if you were behind at all when you registered for bankruptcy. Reinstating your personal liability eliminates that right from the lender and lets you start over and keep current on the loan.