Surety Law Update Winter 2017
In general, a Chapter 7 bankruptcy results in a discharge of pre-petition debts owed by an individual debtor. Certain obligations, however, may survive the Chapter 7 discharge order. One example is a perfected judgment lien. Even though the underlying claim for damages against an individual debtor may be discharged, a perfected judgment lien will remain attached to debtor’s real property without further court order to avoid the lien. If the lien impairs an exemption (i.e., the homestead exemption), the debtor may file a motion with the court to fully or partially avoid the judgment lien (the extent of the avoidance depends on the facts and jurisdiction). Otherwise, the judgment lien remains on title and the lienholder may pursue its lien foreclosure. Such lien claims may result from the sureties’ general indemnity agreement which may contain language sufficient to grant it a security interest in the debtor’s real property. The surety should timely perfect its security before the bankruptcy is filed (if the lien is perfected within 90 days of the bankruptcy filing during the preference period, it may be set aside as a preference). If you have any questions about bankruptcy or judgment liens, feel free to contact Shawn Rediger at Williams Kastner (srediger@ williamskastner.com).