Section 522(f) – Back to Basics

This post is about the basics of § 522(f) lien avoidances in chapter 13 cases – not the mathematical “how-to,” but the types of liens that can be avoided and the importance of claiming all available exemptions.

TYPES OF LIENS YOU CAN AVOID UNDER § 522(f):

There are two types of liens that can be avoided under 11 U.S.C. § 522(f).

The first is a judicial lien.  A judicial lien is a lien obtained by judgment or other legal proceeding.  In Kentucky, a judgment lien attaches to real property and must be recorded in the county in which the debtor’s real property is located.

A mortgage is not a judicial lien.  You cannot avoid a mortgage using § 522(f).

The second type of lien that can be avoided under § 522(f) is a nonpossessory (the creditor does not have possession of the collateral), non-purchase money security interest in household goods and other items described in § 522(f).

Not all liens in household goods are avoidable.  Not all liens of finance companies are avoidable.

If the debtor buys furniture or other household goods on credit, the lien is a purchase money security interest (“PMSI”) which you cannot avoid under § 522(f).

If the debtor goes to the finance company for a loan and the finance company gets a list of stuff the debtor already owns (like cameras, DVDs, extra TV’s, lawn mowers, guns, jewelry), that is a non-PMSI lien which you can avoid.

However, even if the lien is a non-PMSI lien, you cannot avoid it if the lien is on something other than household goods defined within § 522(f).  Many finance companies take a lien on the debtor’s car and household goods.  But § 522(f) excludes vehicles from the definition of household goods.  You can avoid the lien on the household goods, but not on the car.

THE IMPORTANCE OF CLAIMING EXEMPTIONS:

Even if the lien is of a type that can be avoided under § 522(f), you cannot avoid the lien unless it impairs an exemption (i.e., the exemption you claim on Schedule C of the petition).  Otherwise, the lien attaches to the property and is secured to the value of the property.

The problem I have with the mathematical formula in the plan – which perfectly tracks the statute and works – is that it determines the unsecured portion of the claim first (the extent to which the lien is avoided), and the rest of the claim is secured.  My brain wants to determine the amount of the secured claim first (based on the value of the collateral), with the rest of the claim being unsecured.

So forget the mathematical formula for a minute.  Think about it logically.  The debtors own household goods and stuff worth $2,000.  XYZ Finance Company loaned the debtors $3,000 and took a non-PMSI in the stuff.

In a chapter 13, absent § 522(f), XYZ would have a secured claim for $2,000 because that is the value of the stuff.  The rest of its claim would be unsecured.

Under § 522(f), by claiming an exemption in the stuff, it’s as if the exemption now comes ahead of XYZ’s secured claim.

If the debtors claim an exemption of $2,000 in stuff worth $2,000, there is no value left for XYZ’s claim to attach to.  The claim is entirely unsecured.  The lien is completely avoided.

If the debtors claim an exemption of only $500 in stuff worth $2,000, there is still $1,500 of value for XYZ’s lien to attach to.  XYZ has a secured claim of $1,500, and only $500 of the lien is avoided (i.e., treated as unsecured).

If the debtors under-claimed their exemption, they now have to fund the plan to pay a $1,500 secured claim that they should have been able to treat as unsecured.  That is also  prejudicial to other unsecured creditors.

CONCLUSIONS:

The mathematical formula is essential in dealing with judgment liens or multiple liens.  For excellent examples, get the handouts our judges used in their recent Bench and Bar Q&A sessions.

Follow the formula, but understand the underlying process.  Read § 522(f).

Don’t rely on your software.  Review Schedule C.  Your software may give you exemptions only if there is equity.  If you are trying to avoid a lien under § 522(f), make sure you claim the full statutory exemption to which you are entitled.  Proofread the plan.

You CANNOT use § 522(f) to avoid:

• Any mortgage on real property;
• Any purchase money security interest in household goods, furniture, etc.;
• Any lien on a car, truck, RV, ATV, boat, tractor, or other motorized vehicle.

If § 522(f) doesn’t apply, you can value the claim under § 506 of the Code.  In the EDKY plan or the national plan, list the claim under Section 3.2 of the plan.

If there is no value for a secured claim to attach to, the amount of the secured claim is $0 (and thus is unsecured).  This is how you deal with “underwater” junior mortgages.  Read this prior post on stripping off liens for more information.

If the claim is secured by household goods and a car, you may need to treat the claim as two separate claims:  avoid the lien in household goods; value the claim secured by the car.