Bankruptcy: Lien Avoidance - Homestead Exemption in Chapter 7

     In the case of In Re Saeed, the United States Bankruptcy Court in Norfolk, Virginia ruled that the bankruptcy debtors were not entitled to avoid a judgment lien of a distributing company on their Chesapeake, Virginia residence, which the debtors asserted (on motion made two years after the closing of the case, even though the debtors had knowledge of the lien while the case was open) was titled solely in the debtor husband’s name and was actually worth less than the debt owned on the property. 

     In Saeed the debtors contended that the judgment lien impaired the debtor husband’s claimed exemption in the property. The creditor argued that the doctrine of laches should bar the debtors’ motion and that the judgment lien did not impair the homestead exemption. The court found as fact that the debtors were aware of the lien before they filed their bankruptcy petition. The debtors did not move to avoid the lien while the case was open, and the only excuse that the debtors’ offered for the delay in bringing their motion to avoid the lien was that they had been unable to refinance the property because of the lien. The court stated that because the debtors failed to offer any extenuating circumstances that would justify an almost two year delay in bringing their motion to avoid the lien, the delay was not excusable. The creditor alleged that the delay would cause it to face the additional expense and difficulty of attempting to appraise the value of the property as of the petition date two years prior. The court ruled that because the debtors’ delay was inexcusable and the creditor was prejudiced, the creditor met its burden of proving the doctrine of laches. 

     The court stated that a debtor seeking to amend its schedules after its case is closed bears the burden of establishing that the failure to amend the schedules before the case closed was the result of excusable neglect, and, that cause exists to amend the schedules. The court found that the debtors in Saeed failed to prove that the original schedules were entered by mistake, inadvertence, or excusable neglect. The court found as fact that the debtors offered no plausible explanation at all. In addition, the court found that the creditor suffered prejudice because it relied on debtors’ original schedules when determining how to proceed with respect to their judgment lien during the bankruptcy proceeding. The court found that the amended schedules would eliminate the debtors’ equity cushion in the property, and, therefore, eliminate the judgment lien. The court found that for the debtors to delay almost two years from the close of their case to amend their schedules, and to do so without mistake or excusable neglect, would cause the creditor to suffer undue prejudice.

     The court stated that although Bankruptcy Code Section 522(f) provides that a court may avoid a judgment lien to the extent that the lien impairs the equity the debtor has exempted in the property, the court need not even reach the issue of whether the judgment lien impaired the debtor’s claimed exemption and may be avoided. The court noted that under the original bankruptcy schedules the debtors claimed the property as tenancy by the entirety. The creditor’s judgment lien was against husband only and could not attach to entireties property. In their amended schedules the debtors claimed that the property was owned by husband, not tenants by the entireties. Thus, the judgment lien would attach to the property, the lien would impair the claimed exemption, and the lien could be avoided. The court stated that because the debtors offered no plausible explanation for the need to change their schedules and, because of the prejudice to the creditor in relying to its detriment on the original schedules as filed by the debtors, the court denied the debtors’ motion to avoid the lien.