Avoidance can be a good thing or a bad thing in the bankruptcy alphabet.

Lien avoidance is a good thing when we are talking about your second mortgage. In chapter 13, if your first mortgage amount is more than the value of the home, then you may be able to strip your junior mortgage.

Everyone refers to it as a lien strip, or stripping a mortgage, but it is really called lien avoidance under the bankruptcy code.

You may also want to avoid other liens as well. Does a creditor have a judgment against you that attaches to all property you own in the county? If so, you can avoid the lien because it impairs your homestead exemption. Or maybe it impairs your car. Under section 522(f) of the bankruptcy code, you can avoid such a lien in either chapter 7 or chapter 13.

Lien avoidance is a bad thing when the trustee seeks to avoid transfer or preferences you made prior to filing bankruptcy.

Some people make the mistake of paying back Mom & Dad the $5,000 they loaned to the them prior to filing bankruptcy. They get their tax refund in April, give the money back to their parents and then file bankruptcy in May.

Bad idea. You cannot choose to pay one creditor back unequally compared to your other creditors. Yes, it is Mom and Dad, but in the bankruptcy, they are considered the same as any of your credit cards.

Or take the filer who wants to protect his Harley. He sells it to his mother for $10,000 and actually transfers the title. That sounds ok right? He actually received money for it and transferred ownership.

But what if the Harley is really worth $20,000? Then he didn’t receive fair market value and the trustee will avoid this transaction.

(I heard this happen at a creditors meeting once. The debtor sold the motorcycle to his mother for far under market value. His mother was living in a nursing home. The trustee asked if his mother rode very often…. which resulted in chuckles from everyone else in the room. The debtor realized his mistake.)

In both cases, with proper bankruptcy planning, the debtors might have been able to protect the tax refund or the motorcycle. People panic and think they have to get rid of all of their assets. In reality, the vast majority of assets can be protected in bankruptcy.

Please check back in for more posts in the bankruptcy alphabet. I am not looking forward to the challenge of “X” and a few other letters!

For other variations on the letter “A”, visit:

A is for Abandonment

A is for Assumption

A is for Assumption

A is for Assumptions

A is for Arrest

A is for Adversary Proceeding

A is for Alimony

A is for Assets

A is for Ask

A is for Assets

A is for Abuse

A is for Application

Image Credit: Leo Reynolds