A lender has a mortgage lien. What is a lien and does it affect my bankruptcy case?

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mortgage lien consumer bankruptcy

A lender has a mortgage lien. What is a lien and does it affect my bankruptcy case?

A lien is a claim by a creditor against some specific item of your property. The property is called “collateral” for the loan. It guarantees payment in the event that you fail to make the required payments. A mortgage lien is a special type of lien on real estate that’s used to secure repayment of a loan for the purchase price or a home-equity loan.

Your home may be subject to more than one lien (e.g., tax liens, judgment liens, “second” and “third” [or even higher numbered] mortgages). If you fail to make payments, the creditor may enforce its rights by taking the collateral (this is called “foreclosing”), in order to get paid off. Filing Chapter 7 bankruptcy blocks a foreclosure sale temporarily, while filing under Chapter 13 blocks it if your plan provides for paying off the arrearages and keeping payments current during the life of your case (see our discussion on the effect of bankruptcy on foreclosures).

Even though your personal liability to repay a judgment or other debt will probably be wiped out (“discharged”) at the end of your bankruptcy case, liens do not automatically go away. If you do nothing about a lien, the creditor will eventually be able to foreclose and sell the collateral. You have several options to avoid losing your property:

(1) You can “avoid” judicial liens against exempt property. See the discussion of “WHAT DOES IT MEAN TO AVOID A LIEN”.

(2) You can “redeem” the collateral by paying the lender its current market value. See the topic “WHAT IS REDEMPTION.”

(3) You can “reaffirm” the debt on terms that you and the lender mutually agree upon and that are fair to you in the judgment of your attorney or the court. See the topic “WHAT IS REAFFIRMATION.”

(4) You can also avoid the hassle of a foreclosure sale by “surrendering” the collateral to the lender. See the topic “WHAT IS SURRENDER”

(Reviewed 11.14.08)

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