In bankruptcy, debtors have the ability to avoid two types of liens, meaning they can remove the lien from the collateral and make the debt unsecured. A lien can be avoided if it impairs a debtor’s exemption to which the debtor would have been entitled if not for the lien. For example, if a debtor owns a television which is encumbered by a lien, and the debtor has sufficient exemptions available to exempt the television if not for the lien, then the debtor can avoid that lien, meaning the television will no longer be encumbered by the lien.
Avoiding liens is limited to two different types of liens in bankruptcy. The first is judicial liens. A judicial lien is created when a debtor is sued, the plaintiff receives a judgment, and then attaches that judgment to the debtor’s property in the form of a judicial lien. In bankruptcy, judicial liens can be avoided, with one exception. Judicial liens resulting from a domestic support obligation owed by the debtor cannot be avoided. The second type of lien that can be avoided in bankruptcy is a nonpossessory, nonpurchase-money security interest in household furnishings, household goods, wearing apparel, appliances, books, and about ten other types of assets. For the complete list, take a look at 11 U.S.C. § 522(f)(1) which can be found in The Bankruptcy Code. The key thing to pay attention to here is that the security interest must be nonpossessory and nonpurchase-money. Nonpossessory means that the creditor has a lien based upon the fact that they have possession of the property. Nonpurchase-money means that the debt cannot have been accrued as a result of the purchase of the collateral.
The ability to avoid liens is a powerful tool for preserving debtor’s property and reducing their payments in bankruptcy plans. Unfortunately the ability to avoid nonpossessory, nonpurchase-money security interests does not apply to liens on motor vehicles. If a debtor uses their vehicle as collateral for a nonpurchase-money loan, the lien cannot be avoided.