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Fourth Circuit Rules Debtors Not Required to List Properties as Exempt to Avoid Liens - Botkin v. DuPont Community Credit Union

July 22, 2011

As Rubidoux foreclosure defense attorneys, we know serious debt can sometimes go on so long that there's a risk of a court judgment against the debtor. This is bad news, in part because creditors in this situation can end up with a judicial lien -- a court order giving them an interest in a property, often a home. In Botkin v. DuPont Community Credit Union, a bankruptcy debtor and the holder of a judicial lien disputed whether the debtor could avoid the lien for bankruptcy purposes. Anne Botkin of Virginia owed more on residential property than the property was worth when she filed for Chapter 7 bankruptcy. DuPont had a judicial lien on the property for $9,800, for reasons not specified in the opinion. The Fourth Circuit ultimately concluded that Botkin could avoid the lien even though she hadn't claimed an exemption for equity in the property.

When Botkin filed for bankruptcy, she claimed the homestead exemption allowable in her situation, which was $5,500. About half of that amount covered balances in her bank accounts and her anticipated tax refunds, but the other half remained unused. Because she had no equity in her home, she did not claim the remainder of the homestead exemption that way. The trustee later moved to avoid the lien because it impairs an exemption the debtor would otherwise have been entitled to. DuPont did not respond before the deadline, but the bankruptcy court ruled in its favor anyway, saying Botkin had not claimed an exemption in the property subject to the lien. The trustee appealed to the federal district court and won a reversal. That court ruled that the bankruptcy code does not require debtors to claim an exemption in the property subject to the lien they are trying to avoid. DuPont appealed to the Fourth Circuit.

Examining the issue de novo, the Fourth agreed with the district court. Under bankruptcy law, debtors may avoid liens when the lien impairs an exemption the debtor would have otherwise been entitled to. A lien impairs an exemption to the extent that the sum of the lien, all other liens on the property and the amount of the debtor's exemption exceed the value of the debtor's interest in the property if there were no liens. It was not disputed that Botkin meets this test (her interest in the property was zero), but DuPont argued that debtors must claim an interest in the encumbered property in order to avoid the lien. Citing Supreme Court precedent in Owen v. Owen, the Fourth disagreed. The code does not ask whether the debtor currently has an interest; it asks whether the debtor would have an interest in the absence of any liens. Debtors are free to amend their exemption claims after the lien is avoided, and lien holders are free to object to this, the court noted. It upheld the district court and allowed Botkin to avoid the lien.

Our Costa Mesa foreclosure defense lawyers often see bankruptcy cases with multiple debts secured against the home. Homes are one of the most common types of large property that can be encumbered with a judicial lean, and their high value also makes them attractive. A judicial lien might be a factor in a case where the homeowner has been successfully sued over a debt or owes long-overdue taxes. Of course, homes are typically also encumbered by the mortgage -- and as with Botkin, it's common these days for bankruptcy filers to be underwater on that mortgage, leaving little for the lienholder to collect. As Vista foreclosure defense attorneys, we wouldn't be surprised to learn that lien avoidance cases like this are becoming common across.

Howard Law PC offers free, confidential consultations, so you risk nothing by talking to us about your mortgage situation and your options. To learn more, you can call us toll-free at 1-800-872-5925 or send us an email.

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