During the course of a Chapter 7 bankruptcy proceeding, a debtor may seek to avoid a lien filed by a condominium or homeowner association against the debtor’s real property for failure to pay maintenance fees. However, it’s important to examine the classification of the lien prior to determining whether the lien can avoidable in bankruptcy.
What Types of Liens are Avoidable in Chapter 7?
Generally, an association will seek payment against a member by: (1) personally suing the member for failure to pay maintenance fees and obtaining a final judgment (a judicial lien); (2) filing a consensual or statutory lien against the real property pursuant to the Master Deed or Declaration of Covenants, Conditions and Restrictions; or (3) seeking both of the aforementioned remedies.
Pursuant to Section 522(f)(1) of the Bankruptcy Code, “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such impairs an exemption…if such lien is- (A) a judicial lien….See 11 U.S.C. § 522(f)(1). A judicial lien is defined as a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” See 11 U.S.C. § 101(36). In other words, a Chapter 7 debtor can seek to avoid a “judicial lien”, which resulted from a lawsuit and final judgment obtained against the debtor prior to bankruptcy. However, the judgment must impair the debtor’s bankruptcy exemptions. Thus, if the association sued the debtor personally, obtained a final judgment, and the judgment impairs the debtor’s exemption, then the lien is avoidable. For an in-depth explanation of avoiding a judicial lien, please Click Here.
However, a consensual or statutory lien created by a Master Deed or Declaration of Covenants, Conditions and Restrictions will not be avoidable pursuant to Section 522(f)(1) of the Bankruptcy Code. In recent months, New Jersey federal courts have reviewed condominium and homeowner association laws as they relate to liens being placed on real property. Interestingly, a split of opinions has emerged in the New Jersey Bankruptcy Courts. What has become unequivocally clear however, are that liens placed by associations are either statutory or consensual, unless the debtor is sued personally.
In re Rones, 551 at 170-71 (“[A]s the Bankruptcy Court itself observed when determining whether the [l]ien was consensual or statutory, the Condominium Act did not create the [l]ien-it was created by the Master Deed.”);(In re Smiley, 569 B.R. 377, 389 (Bankr. D.N.J. 2017)(“The condominium association appealed Judge Gravelle's ruling. It is important to note that on appeal to the district court, the parties did not contest Judge Gravelle's characterization of the condominium association's lien as a consensual lien.”); In re Smiley, 569 B.R. at 393 (“[T]he Court finds the Association's secured claim is secured by both a statutory lien arising out of the Condominium Act and a consensual lien arising out of the Master Deed.”); In re Holmes, 573 B.R. 549 (Bankr. D.N.J. 2017)(Holding the condominium lien was in nature of a consensual lien, and not a statutory lien.”); In re Keise, 564 B.R. 255, 263 (“In contrast, this Court views the Association’s claim as secured simultaneously by two separate liens, one consensual created by the Declaration, and one statutory…with each lien available to the Association to enforce its claim.”); and In re Robinson, No. 11-26981-RTL, 2012 WL 761251, at *3 (Bankr. D.N.J. Mar. 7, 2012)(“First, the Association has a lien which arises from the master deed and the statute.”).
Likewise, cases throughout the country have found condominium and homeowner association liens are not voidable under Section 522(f) of the Bankruptcy Code, due to the nature of the lien. See e.g., In re Beckley, 210 B.R. 391, 393 (Bankr. M.D. Fla.1997) (holding that a lien obtained by a homeowner association against a debtor was not avoidable pursuant to 11 U.S.C. § 522(f)(1) because the debtor's warranty of deed subject to the association's declaration of covenants created a “security interest,” not a “judicial lien”); In re Phillippy, 178 B.R. 67, 68 (Bankr. M.D. Pa. 1994) (holding that a lien for unpaid homeowner association assessments was not avoidable as a “judicial lien,” but was a “security interest” created by an agreement resulting from the terms of a declaration of covenants); In re Bland, 91 B.R. 421, 423 (Bankr.N.D.Ohio 1988) (holding that an assessment payable to a condominium association pursuant to the terms of a declaration is a “security interest” not an avoidable “judicial lien”); and In re King, 208 B.R. 376 (Bankr. D. Md. 1997)(Holding Chapter 7 Debtor could not avoid condominium lien, whereby the lien was not a judicial lien.).
Accordingly, if an association obtains a lien solely by virtue of a lawsuit against the debtor personally, then it is possible that the debtor may avoid the judicial lien. However, if the association placed a consensual or statutory lien by virtue of a Master Deed or Declaration of Covenants, Conditions and Restrictions, then the debtor will not be able to avoid the lien. Therefore, it is important to determine the classification of the lien prior to filing a motion to avoid an association’s lien. If the debtor cannot avoid the lien in Chapter 7, then the debtor may consider satisfying the lien in a Chapter 13 bankruptcy proceeding.
If you are seeking to avoid a lien placed by a condominium or homeowners association, please call our firm for a free consultation and speak with one of our experienced bankruptcy attorneys.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.