If you regularly file bankruptcy cases, or represent clients in real estate closings or refinances, chances are you have been confronted with a judicial lien on your client’s real estate either pre-discharge or that still remains after the discharge has been granted. This is usually the result of the Debtor allowing a default judgment to be entered against him by a creditor prior to filing his bankruptcy case. Frequently, the Debtor is sued, the return date passes, and when the Debtor hears nothing further from the Plaintiff s counsel, he figures the case somehow disappeared. Frequently, the Plaintiffs counsel, rather than use a citation procedure, will simply obtain a Memorandum of Judgment from the Court and file it in the county where Debtor resides. This places a judgment lien against Debtor’s real estate.
When the Debtor eventually goes to a bankruptcy attorney, he may list the creditor on his Petition but fail to tell the attorney about the lawsuit. Occasionally, the Debtor (for whatever reason) does not receive the summons and the judgment lien is put on title without the Debtor even knowing he was sued. Months, or even years, after the discharge, when the Debtor goes to sell or refinance his homestead he discovers the lien and has an immediate panic attack.
Fortunately for the Debtor, the lien can be avoided under 11 USC 522 (f)(1) if the lien impairs the Debtor’s homestead exemption.1 The question for counsel is how to determine if the lien really does impair the exemption.
The statutory authority for the homestead exemption in Illinois can be found at 735 ILCS 5/12-901. It provides for the miserly homestead exemption of $7,500.00 per person. (Note: This has been the amount of the exemption for over twenty years despite massive appreciation of real estate values and steady inflation. It is also one of the lowest homestead exemptions in the country. However, the injustice of this miserly exemption is fertile ground for a future article.) Therefore, a single Debtor is entitled to receive $7,500.00 exempt from the creditor’s judgment lien and joint Debtors receive $15,000.00.2
To calculate whether the lien impairs the exemption, we look to Bankruptcy Code 11 USC 522 (f)(2)(a) which states:
"(2)(a) For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of
(i) the lien;
(ii) all other liens on the property; and
(iii) the amounts of the exemption that the debtor could claim if there were no liens on the property;
exceeds the value that the debtor’s interest in the property would have in the absence of any liens."
Determining whether the judgment lien can be avoided now becomes a matter of putting the appropriate numbers into this formula.
First of all, how much is the judgment lien? You can get a copy of the recorded Memorandum from the County Recorder or title company. Be sure to add interest at the statutory judgment rate of 9% per annum from entry of the judgment until the date of bankruptcy filing, (not the day you are filing the lien avoidance motion).3 This is the total amount of the creditor’s lien.
Secondly, we need to calculate the amount of the other liens. The date for measuring the fair market value of the Debtors real estate and the amount of liens thereon is the date the bankruptcy case is filed.4 Therefore, we need to know the balance due of the Debtor’s mortgage(s) as of the filing date. There will also be a lien for real estate taxes for the year in which the case is filed. The Illinois Property Tax Code provides that the real estate taxes on the property shall be a prior and first lien on the property superior to all other liens and encumbrances from January 1 in the year taxes are levied until they are paid or sold.5 Even though the taxes are not billed or collected until the following year and even though the amount is unknown when they are levied they constitute a superior lien to a judgment lien entered in that year. Therefore, you need to determine as quickly as possible what the property tax bill is for the year of the judgment lien. Also, do not forget that other liens also may be on the property such as Internal Revenue Service, Illinois Department of Revenue or homeowners associations, etc.
Thirdly, we add the $15,000.00 homestead exemption to the first two numbers ($7,500.00 for one Debtor).
Lastly, we need to determine the value of Debtor’ s property without any liens. This would be the fair market value of the property as listed on Schedule A of the Petition as of the filing date.
It now becomes a matter of running the numbers. For purposes of example, consider the following facts as plugged into the formula:
1. Judgment Lien (Judgment is against both Husband and Wife-Debtors) - $10,000.00
2. First Mortgage - $180,000.00
3. Real Estate Taxes for year bankruptcy filed - $5,000.00
4. Debtors Exemption (Joint) - $15,000.00
TOTAL - $210,000.00
5. Fair Market Value of Debtors homestead real estate per Schedule A - $195,000.00
(Note: You are not allowed to deduct estimated closing costs from the fair market value thereby decreasing property value and increasing impairment.6
11 USC 522(f)(2)(a) states that the homestead exemption is impaired to the extent that the sum of the liens and exemptions (#1-4 above $210,000.00) exceeds the balance of the real estate without liens ($195,000.00). Therefore, the Debtors homestead exemption is impaired to the extent of:
$210,000.00 Liens and Exemptions
$195.000.00 Value of Homestead without Liens
$ 15,000.00 Impairment
Since the impairment ($15,000.00) is greater than the judgment lien ($10,000.00), the lien is avoided entirely.
Now, for sake of example, let’s change the market value of the homestead to $203,000.00. The amount of impairment now becomes $210,000.00 less $203,000.00 being $7,000.00. Since the impairment ($7,000.00) is less than the full amount of the judgment lien ($10,000.00), the lien is avoided only to the extent of $3,000.00. There remains on the property a non-avoidable lien of $3,000.00. Some courts had previously adopted an "all or nothing rule" meaning that any impairment of the exemption was deemed to avoid the entire judgment lien.7 However, most recent decisions, (including in the Northern District of Illinois ), allow for partial lien avoidance.8
Procedurally, a Motion to reopen a case to avoid a judgment lien can be brought at any time, even after the case is closed (even several years after the case is closed). There is a $155.00 fee to the Clerk to reopen the case. The Seventh Circuit has ruled that a Debtor, absent a finding of prejudice to the creditor, may reopen a case at any time to avoid a judicial lien.9 If the creditor has taken no action to foreclose the lien, there is no prejudice to creditor. If a creditor has incurred costs in attempting to foreclose the lien then the Debtor may be unable to avoid the lien or at least would have to pay creditor costs. Therefore, if you are a creditor, do not delay foreclosing your lien.
When you file your motion, I suggest attaching as exhibits the following:
1. Copy of filed Memorandum of Judgment;
2. Copy of Discharge;
3. Copy of Real Estate Tax Bill for the year of case filing;
4. Copy of the Petition Schedule D showing balance of mortgages on the property and other liens;
5. Copies of any other liens;
6. Copy of Petition Schedule A showing value of real estate; and
7. Copy of Petition Schedule C showing the homestead exemption was properly claimed.
This procedure works in Chapter 7 or 13 cases. In Chapter 13, the avoided lien amount becomes general unsecured debt which can be paid at pennies on the dollar rather than one hundred percent.
Lastly, if your client has been sued prior to the filing of the bankruptcy, I suggest running a tract search to identify judgment liens prior to filing the case. They can then be disposed of during the pendency of the bankruptcy case. Although the client will have to pay the additional cost of a tract search, it seems better to know about the lien at the time of the bankruptcy rather than several years thereafter.
Using this procedure will be a great help to your client get the fresh start which they sought when the filed bankruptcy.
111 USC 522(f)(1) states in relevant part: "the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is- (A) a judicial lien, other than a judicial lien that secures a debt [for alimony, maintenance, and support]."
2 735 ILCS 5/12-901
3 735 ILCS 5/2-1303 and 735 ILCS 5/12-109
4 In re Girard, 98 B.R. 685 (Bankruptcy D. Vt. 1989), In re Vokac, 273 B.R. 553 (Bankruptcy N.D. IL 2002 - Judge Squires).
5 See 35 ILCS 200/21-75. See also Handy Andy Home Improvement Center, Inc., 196 B.R. 87, 90 (Bankruptcy N.D. IL 1996), Affirmed 222 B.R. 149 (Bankruptcy N.D. IL 1997), Affirmed 144 F3d 1125 (7th Circuit 1998).
6 See In re Sheth 225 B.R. 913 (Bankruptcy N.D. IL - 1998)
7 See In re VanZant 210 B.R. 1011 (Bankruptcy S.D. IL - 1997)
8 See In re Sheth 225 B.R. 913 (Bankruptcy N.D. IL - 1998 - Judge Katz, In re Vokac, 273 B.R. 553 (Bankruptcy N.D. IL - 2003 - Judge Squires).
9 In re: Matter of Bianucci, 4 F3d 526, 578 (7th Circuit, 1993)
Kent A. Gaertner is a partner in the Law Firm of Springer, Brown, Covey, Gaertner & Davis, LLC with offices in Wheaton, Naperville, Batavia, Addison and Elmhurst. The firm concentrates its practice in all phases of Bankruptcy Law and Assignments for the Benefit of Creditors. Mr. Gaertner is a two-time past chairman of the DuPage County Bar Association Bankruptcy Committees and has been a Director of the DuPage County Bar Association since 2001.