Article I, Section 8, of the United States Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” [1] Under this grant of authority, Congress enacted the “Bankruptcy Code” in 1978. [2] The Bankruptcy Code, which is codified as Title 11 of the United States Code, has been amended several times since its enactment. [3] It is the uniform federal law that governs all bankruptcy cases. [4]
Bankruptcy helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan. [5] Bankruptcy laws also protect financially troubled businesses. [6] In a recent decision, the United States Bankruptcy Court for the Southern District of Ohio provided valuable insight into one of the many provisions meant to help provide this fresh start. [7] While only covering a very small piece of bankruptcy law, the following analysis illustrates how the smallest details create the biggest features of the Bankruptcy Code.
II. The Avoidance Provision
A key feature of bankruptcy proceedings is the avoidance of liens on a debtor’s property. [8] While this is commonly done by a trustee [9] under 11 U.S.C.A. § 547, [10] in certain instances it is also accomplished by a debtor. [11] One type of such debtor’s avoidance is the avoidance, under the provisions of 11 U.S.C.A. § 522(f)(1)(A), of a judicial lien on exempt [12] personal property. [13] In cases involving avoidance of judicial liens on personal property, courts have expressly stated the purpose of the provisions: to allow the debtor a fresh start through the preservation of bankruptcy exemptions even in instances where creditors have obtained pre–petition liens on property which would otherwise be exempt. [14]
III. The Formula
Section 522(f) of the Bankruptcy Code allows a debtor to “avoid the fixing of a [judicial] lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled[.]” [15] The formula to calculate whether a lien impairs a debtor’s exemption is set forth in the statute:
[A] lien shall be considered to impair an exemption to the extent that the sum of—
(i) the lien;
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could claim if there were no liens on the property;
exceeds the value that the debtor’s interest in the property would have in the absence of any liens. [16]
Put another way, lien avoidance can be calculated by: (1) determining the value of the debtor’s interest in property; (2) deducting the value of those liens that are not being avoided; and (3) deducting the value of the debtor’s exemption. [17] If this results in a positive figure, the judicial liens cannot be avoided to the extent of that positive figure because there exists non-exempt equity in that amount to which the liens could attach; if the resulting figure is negative, the judicial liens may be avoided in their entirety. [18] For example, suppose a debtor files a motion to avoid a certain judicial lien encumbering his property under § 522(f)(1) of the Bankruptcy Code. Moreover, assume in that motion the debtor alleges that: the value of (and the value of the debtor’s interest in) the property is $300,000; the debtor is entitled to an exemption in the property of $100,000; and the property is subject to a mortgage in the amount of $250,000 and a judgment lien in the amount of $5,000. The following table would represent the debtor’s impairment calculation:
| Motion #1 | |
| Debtor’s Interest | $300,000 |
| Other Liens | – $250,000 |
| Debtor’s Exemption | – $100,000 |
| ($50,000) |
In the above instance, the judgment lien could be avoided in its entirety because the result of the calculation is negative.
IV. The Fundamental Flaw
When a debtor desires to avoid more than one judgement lien, the proposed calculations may suffer from a fundamental flaw: the calculations might conflict with § 522(f)(2)(B), which provides that, “[i]n the case of a property subject to more than 1 lien, a lien that has been avoided shall not be considered in making the calculation under subparagraph (A) with respect to other liens.” [19] As many courts have noted, this means that a debtor must perform a separate calculation under § 522(f)(2)(A) for each judicial lien that the debtor seeks to avoid. [20] It is insufficient to attempt to avoid all liens in one calculation or to use the identical calculation in separate motions seeking to avoid other judicial liens against the same property. [21] Accordingly, where there are pending motions to avoid particular liens, or a lien has already been avoided, such liens are excluded from the calculation. [22] For example, suppose a second debtor files four motions to avoid certain judicial liens encumbering his property under § 522(f)(1) of the Bankruptcy Code. Moreover, assume that in those motions the debtor alleges that: the value of (and the value of the debtor’s interest in) the property is $300,000; the debtor is entitled to an exemption in the property of $89,000; and the property is subject to a mortgage in the amount of $200,000 and four judgment liens in the amounts of $5,000 each. The following table might represent the debtor’s proposed impairment calculation:
| Motion #1 | Motion #2 | Motion #3 | Motion #4 | |
| Debtor’s Interest | $300,000 | $300,000 | $300,000 | $300,000 |
| Other Liens | – $215,000 | – $215,000 | – $215,000 | – $215,000 |
| Debtor’s Exemption | – $89,000 | – $89,000 | – $89,000 | – $89,000 |
| ($4,000) | ($4,000) | ($4,000) | ($4,000) |
In each of the motions, the debtor includes in his § 522(f)(2)(A) calculation the three judgment liens that are not the subject of that particular motion. The calculations appear to show that each judgment lien could be avoided because each result is negative. However, when a debtor factors in the value of all of the other judgment liens in each motion, the calculation method disregards the plain language of § 522(f)(2)(B) and impermissibly shields non-exempt equity from lien attachment. [23]
V. The Correct Calculation
In order to comply with § 522(f)(2)(B), a debtor must omit one of the judgment liens with each new impairment calculation, even if the debtor seeks to avoid each lien contemporaneously. [24] For instance, avoiding one of three liens on a property will require including the two other liens in the § 522(b)(2)(A)(ii) portion of the formula in order to successfully avoid the first lien. [25] If the debtor seeks to then avoid the second lien (having already sought to avoid the first lien, whether pending or granted), the formula would only include the third lien as the first must be deemed already avoided for purposes of the analysis and excluded from the calculation assuming the first is avoidable in its entirety. [26] For example, the following table would represent the above discussed second debtor’s correct impairment calculation:
| Motion #1 | Motion #2 | Motion #3 | Motion #4 | |
| Debtor’s Interest | $300,000 | $300,000 | $300,000 | $300,000 |
| Other Liens | – $215,000 | – $210,000 | – $205,000 | – $200,000 |
| Debtor’s Exemption | – $89,000 | – $89,000 | – $89,000 | – $89,000 |
| ($4,000) | $1,000 | $6,000 | $11,000 |
Here, only the first motion results a negative figure. Therefore, only the first judgment lien is entirely avoidable. The second, third and fourth liens are not avoidable to the extent of their respective positive result because that number represents the non-exempt equity to which the lien could attach. [27]
As another example, consider a third debtor who also files four motions to avoid certain judicial liens encumbering his property under § 522(f)(1) of the Bankruptcy Code. Moreover, assume that in the motions the debtor alleges that: the value of (and the value of the debtor’s interest in) the property is $350,000; the debtor is entitled to an exemption in the property of $130,000; and the property is subject to a mortgage in the amount of $200,00 and four judgment liens in the amounts of $35,000, $5,000, $5,000, and $5,000 respectively. The following table might represent the debtor’s proposed impairment calculation:
| Motion #1 | Motion #2 | Motion #3 | Motion #4 | |
| Debtor’s Interest | $350,000 | $350,000 | $350,000 | $350,000 |
| Other Liens | – $245,000 | – $240,000 | – $235,000 | – $200,000 |
| Debtor’s Exemption | – $130,000 | – $130,000 | – $130,000 | – $130,000 |
| ($25,000) | ($20,000) | ($15,000) | $20,000 |
Here, the table represents the correct calculation. Avoiding the first of four liens on the property required including the three other liens in the § 522(b)(2)(A)(ii) portion of the formula in order to successfully avoid the first lien. When the debtor sought to then avoid the second lien (having already sought to avoid the first lien), the formula only included the third and fourth lien as the first is deemed already avoided for purposes of the analysis and excluded from the calculation assuming the first is avoidable in its entirety. Similarly, when the debtor sought to then avoid the third lien (having already sought to avoid the first and second liens), the formula only included the fourth lien as the first and second are deemed already avoided for purposes of the analysis and excluded from the calculation assuming the first and second are avoidable in their entirety. Finally, when the debtor sought to then avoid the fourth lien (having already sought to avoid the first, second and third liens), the formula included none of the judicial liens as the first, second and third are deemed already avoided for purposes of the analysis and excluded from the calculation assuming the first, second and third are avoidable in their entirety. Consequently, in each of the first, second and third motions, the result is negative. Therefore, the first, second and third judgment liens could be avoided in their entirety. Only in the last motion is the result positive. Therefore, the fourth lien could not be avoided to the extent of $20,000 because that represents the non-exempt equity to which it could attach. [28]
When a debtor’s impairment calculations do not comply with § 522(f)(2)(B), the motions containing those calculations will be denied as disregarding the plain language of the statute and impermissibly shielding non-exempt equity from lien attachment. [29] A debtor wishing to seek avoidance of the liens will then have to file new motions, excluding in each motion’s calculation any lien(s) that the debtor is deemed to have already avoided under § 522(f)(2)(B). [30]
VI. Conclusion
Providing debtors a “fresh start” is an essential principle of the bankruptcy laws. One way the Bankruptcy Code effectuates this principle is through the avoidance of liens on a debtor’s property. Particularly, section 522(f) of the Bankruptcy Code allows a debtor to avoid judicial liens to the extent that such liens impair an exemption to which the debtor would otherwise be entitled. When used correctly, these judicial lien avoidance provisions provide a valuable opportunity for an individual debtor to obtain relief from indebtedness and begin anew as a productive member of society.
[7] In re Johnson, 609 B.R. 728 (Bankr. S.D. Ohio 2019) (holding that a debtor’s calculation of extent of impairment under 11 U.S.C.A. § 522(f)(1)(A) improperly factored in the value of all three of the other judgment liens that debtor sought to avoid).
[8] 124 A.L.R. Fed. 465 (Originally published in 1995).
[9] Elizabeth Warren, Jay Lawrence Westbrook, Katherine Porter & John Pottow, The Law of Debtors and Creditors: Text, Cases, and Problems 58 (7th ed. 2014). The trustee administers the debtor’s estate by gathering all the estate assets. In a liquidation case, the trustee sells the assets; in a reorganization case, the trustee administers the bankruptcy case. The trustee has a special obligation (by custom and common law) to unsecured, general creditors and therefore is especially charged with scrutinizing the debtor’s reports to locate any concealed property or to discover any wrongdoing that might result is a failure to get a discharge. The trustee is also careful to be sure that no one creditor tries to take more than its share and thus challenges security interests or claims to special priority treatment.
[10] 11 U.S.C.A. § 547(b) provides that “the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property—(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made—(A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and (5) that enables such creditor to receive more than such creditor would receive if—(A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title.”
[11] 124 A.L.R. Fed. 465.
[12] Elizabeth Warren, Jay Lawrence Westbrook, Katherine Porter & John Pottow, The Law of Debtors and Creditors: Text, Cases, and Problems 79 (7th ed. 2014). The law in every state makes at least some property exempt from execution and other legal process so that no debtor can be reduced to absolute destitution. “Exempt” property under state law means exempt from seizure by writ through the formal collection law. When the debtor waives that exemption, by granting a voluntary security interest with a home mortgage or car lien, the exemption protection falls by the wayside. In bankruptcy, all property not listed as exempt is denominated nonexempt and will be sold by the trustee so that the proceeds can be distributed to the creditors.
[13] 124 A.L.R. Fed. 465.
[15] In re Johnson, 609 B.R. 728, 729 (Bankr. S.D. Ohio 2019) (quoting 11 U.S.C. § 522(f)(1)).
[19] Id. at 730 (quoting 11 U.S.C. § 522(f)(2)(B)).
[27] Here, $4,000 of the second lien could be avoided whereas the third and fourth liens are entirely unavoidable.
[28] Here, $15,000 of the fourth lien could be avoided which would still leave $20,000 to which the lien would attach.
[29] 01-15-20 West’s Bankr. Newsl; In re Johnson, 2019 WL 6903972 (Bkrtcy. S.D.Ohio, Judge Hoffman).
[30] In re Johnson, 609 B.R. at 731.