The power a lender has to enforce a lien can be scary. Someone who lends you money while gaining a lien over your property has the considerable advantage of securing that loan, with the possibility of suing for what is owed, repossessing the collateral, or both. A lien can also be imposed against someone as a result of a lawsuit. Liens are punishing indeed. But before a lien holder has the power to come after your stuff, the lien must have been entered the right way. In order to comply with the law, someone who wants to put a lien on your property must undergo a process called “perfecting” the lien. A lien that has not been perfected is will not work.
Perfecting the lien essentially requires that the lien holder alert others as to his possession of an ownership interest in the property. The lien is “perfected” once these requirements have been met, and they will generally call for some form of addition to the public record. So, for example, in order to perfect a lien on your motor vehicle, the person lending you money with the car for collateral will have to be listed on the certificate of title before the lien is considered right. To perfect the lien on your home when you take out a mortgage, the lender seeking to place a lien must generally record the mortgage document with the county.
This information is very important to have as you prepare to declare bankruptcy. That’s because if the lien is found to be invalid, the trustee in a Chapter 13 could assume the property interest of the lien holder. Any lien that isn’t perfected by the time of the bankruptcy filing has missed the deadline, and the Trustee can sell the property in a Chapter 7, or require you to pay the fair market value of the item in a Chapter 13. Even if you’ve filed a Chapter 7 and the lien is declared invalid, it is possible to convert to a Chapter 13 to avoid losing the property. If the asset is a vehicle, paying the fair market value for the vehicle is likely to be a great deal for you. If the asset is a house, on the other hand, it may be impossible to pay the fair market value of the home over the course of your 5 year Chapter 13 plan. If this is your situation, consult with an attorney on working out a plan that fits your standards.
Another glitch occurs if a lien isn’t perfected at the same time that a loan is made, but instead is perfected immediately before the bankruptcy is filed. The reason is that perfecting a lien is viewed by the law as a transfer of property. Because of certain rules in the Bankruptcy Code concerning what are known as “avoidable preferences,” should the borrower file for bankruptcy protection shortly after the perfection, the law will look on this transfer (from the borrower to the lender) as unfair to the borrower’s other creditors. This transfer of property will thus often be voided, and you’ll be in the position to pay out the equity value through your Chapter 13 plan.
As you can see, understanding the status of a lien and how that affects your property during a bankruptcy filing can be confusing; these kinds of legal gray areas are precisely why you want to count on an experienced bankruptcy attorney to guide you through the process with ease.