When you take out a short-term loan, the finance company might ask you to pledge property you own as collateral, such as household appliances or electronics. By pledging property you own as collateral, you grant the finance company a security interest in it. That means if you default on the loan, the finance company can demand that you turn over the property. Most finance companies do not actually want the items you pledged as collateral, but that does not stop them from using the threat of taking your property as a means to elicit payment from you. In bankruptcy, consumers have the opportunity to get rid of these security interests through a process known as lien avoidance. If you are struggling with short-term loans, payday loans or other types of debt, an experienced Kansas City bankruptcy attorney can explain how Chapter 7 or Chapter 13 bankruptcy may offer you a fresh start.
Property That Qualifies for Lien Avoidance
Bankruptcy law allows you to avoid non-possessory, non-purchase money liens in the following types of property:
- Household goods and furnishings
- Wearing apparel
- Musical instruments
- Health aids
- Tools of the trade
Although borrowers sometimes pledge vehicles as collateral, you cannot avoid a non-possessory, non-purchase money security interest in a vehicle unless it qualifies as a tool of the trade.
Non-Possessory, Non-Purchase Money Security Interests
Only non-possessory, non-purchase money security interests qualify for lien avoidance on household goods. Non-purchase money means you did not use the loan funds for the purchase of the collateral, i.e., you pledged property you already owned as collateral. If you took out a loan to buy a vehicle, for example, you cannot avoid the lien. Non-possessory means the collateral remains in your possession. For example, a pawn loan would not qualify for lien avoidance, because the pawnshop holds the collateral. A qualified Kansas City bankruptcy lawyer can determine whether any of your secured debts involve non-possessory, non-purchase money security interests.
Collateral Must Be Exempt
In order to avoid a non-possessory, non-purchase money lien, you must be able to claim the collateral as exempt in your bankruptcy. If the property is fully exempt, you can eliminate the entire goods lien. If the property is only partially exempt, however, you can only avoid the lien to a certain extent. A knowledgeable Kansas City bankruptcy attorney can assist you with bankruptcy exemptions and determine whether any of your secured loans are eligible for lien avoidance.
Why Avoid a Household Goods Lien?
When you avoid a lien in bankruptcy, the lender no longer holds a security interest in your property. That means you own the collateral free and clear again. Avoiding a lien in bankruptcy typically involves filing a special motion with the bankruptcy court. A Kansas City bankruptcy lawyer can assist you with the entire lien avoidance process.