So what is a lien?
The short answer is that a lien is a legal mechanism that gives a creditor the right to sell a certain piece of property (or get paid from the sale of the property) if a specific loan is not paid.
Liens usually survive Chapter 7 bankruptcy or Chapter 13 bankruptcy, and you must usually continue to pay the loan secured by the lien if you want to keep the property.
The long answer, however, is much more interesting.
Webster’s dictionary defines a lien as: “In law, a charge or encumbrance upon property for the satisfaction of a debt or other duty.”
The word “lien” is derived from the French word for knot or bond. This is because unlike most debts, a debt secured by a lien is tied to or bound to a certain piece of property. The property tied to the lien is called the collateral. Many type of property can be collateral.
Below are a few common types.
TYPES OF LIEN AND COLLATERAL
1. Mortgage or deed of trust
A mortgage or deed of trust is a lien that secures a debt to a piece of land, or something built on a piece of land.
The land or structure is the collateral; the lender can foreclose on it if the loan is not repaid.
2. Security interest
A security interest can attach to almost any property that isn’t land. The most common example of a security interest to most people is a car loan.
If you live in Minnesota, you can tell whether a car loan has been properly perfected by looking at the most recently issued version of the car’s title. It will list the owner on the right-hand column, and it will list the lien holder on the left-hand column.
If there is no lien, then the left-hand column will say “no security interests.” If there is a lien, then the title will have the lien holder’s name and address written on the left-hand column.
3. Tax lien
A tax lien arises when you do not pay state or federal taxes for several years. Unlike a mortgage or security interest, it attaches to all property that you own. Tax liens are also unique in that their recording requirements are less.
They are effective against the taxpayer immediately, and effective against other parties (such as buyers of the property or other lenders) when they are recorded in the state where the taxpayer or the property is located.
4. Judgment lien
A judgment lien comes into existence, at least in Minnesota, when a creditor gets a judgment against you and dockets in a county where you own land.
The judgment becomes a lien against any and all land that you own in that county. In order to sell the land, you must pay the judgment.
A judgment lien, unlike the other liens listed above, will go away in a Minnesota bankruptcy, provided that your only land is your homestead. This is one of the reasons why bankruptcy is such a powerful tool.
WHAT HAPPENS TO LIENS IN BANKRUPTCY
Most liens (but not judgment liens against homesteads) survive a bankruptcy.
Your personal liability on the loan (the creditors ability to sue you for a money judgment) goes away, but the lien will survive, which is why people commonly pay their mortgages after bankruptcy, and keep their houses.
One of the basic rules of bankruptcy is that loans secured by liens survive, but unsecured loans (loans without a lien) are discharged.
When you file for bankruptcy you must generally decide whether to keep any property that is collateral for a lien, and keep making the payments, or whether to surrender it to the lien holder.
One of the reasons that secured loans have much lower interest rates than unsecured loans is that they are often paid even if the borrower files for bankruptcy.
This is because the borrower either sells the collateral to pay of the lien, the lien holder forecloses and sells the property, or the borrower continues to pay the lien after the bankruptcy.
WHAT TO DO NEXT
Now you know more about liens and bankruptcy, you’ll be able to decide if filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota, is right for you.
Need more help? Why not not speak to us now at 612.824.4357? We’ll give you all the help and advice you need.
Alternatively, fill out our free Bankruptcy Evaluation Form to see if filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota is right for you.
We’re looking forward to helping you.
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