Understanding the Differences In Liens Skip to main content

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Understanding the Differences In Liens

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Liens―a kind of property interest that secures payment on a loan, or the performance of some obligation―are a thorny little issue in bankruptcy cases. Unlike many kind of debts, liens generally (with only a few exceptions) will not be discharged automatically in a bankruptcy the way unsecured debt is. Liens come in many flavors―how about tax liens, mortgage liens, and mechanic's liens, to name a few― but they generally fall into one of two categories: consensual liens and nonconsensual liens. Consensual liens are themselves split into two categories; one category of consensual liens is generally referred to as a "purchase-money interest," while the other is known as a "nonpurchase-money security interest."
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1) Consensual Liens
purchase-money security interests, nonpurchase-money security interest

2) Nonconsensual Liens
Judgment liens, statutory liens, tax liens.

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Ok, there you have it, your daily dose of jargon. Now what does it all mean?!

Let's start with consensual liens. A consensual lien is one, as the name suggests, that you enter into voluntarily, that is to say, one you grant to someone else willingly. We generally refer to "security interests" when we are dealing with consensual liens involving some item of personal property, for example, your car. If the lien concerns real property (for example, your house), then we will generally refer to "mortgages" or "deeds of trust."

A purchase-money security interest arises in the situation where the proceeds of a loan are used toward buying a particular item. So, for example, take the instance where you go to buy a car with the help of financing. The company that gives you the loan is giving it specifically for the purchase of that car; the car secures the loan for the company, which gains a "purchase-money security interest," a kind of lien, over the car. If you default, the lender is entitled to repossess the car. Although bankruptcy does not get rid of a purchase money lender's right to repossess the collateral, a Chapter 13 bankruptcy can give you an opportunity to cure your default over a five year period.

On the other hand, you will likely encounter a non-possessory non purchase-money security interest in the situation where lenders make small loans, especially to people with not-great credit. The loans will often be secured by having the borrower give the creditor a security interest in certain household goods. These kinds of loans can be avoided in a bankruptcy, reverting the lender's interest to an unsecured claim, which means they will receive little or no payment in the bankruptcy. What if the non-purchase money security interest is in other personal property, like an auto? In these cases, the lender's interest can be crammed down to the current fair market value of the property, which is usually far less than the amount of loan.

But what about non-consensual liens? These, unfortunately, are much trickier to deal with. Non-consensual liens are placed on your property without your having agreed to it. For example, if you are sued by a creditor and the creditor prevails, they will docket a judgment lien against any property you own. If you want to sell or refinance your property, the judgment must be paid from the proceeds. Under the bankruptcy code, these types of liens can be canceled to the extent they impair a property exemption. If you have a judgment lien against your property, talk to a bankruptcy attorney to find out if the lien can be avoided.

In summary, bankruptcy can help you effectively deal with both consensual and non-consensual liens. If you're struggling with unsecured or secured debt, bankruptcy is a powerful remedy to help you get back on your feet. Contact a bankruptcy attorney today to find out how. In North Carolina, call the Law Offices of John T. Orcutt to discuss your options. 1-888-234-4181.

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