Case No. 05-12006.United States Bankruptcy Court, N.D. Indiana, Fort Wayne Division.
February 15, 2006
DECISION ON MOTION TO AVOID LIENS
ROBERT GRANT, Bankruptcy Judge
This matter is before the court on debtor’s motion, filed pursuant to 11 U.S.C. § 522(f)(1), to avoid judicial liens which allegedly impair her exemption in residential real estate. The liens in question are held by American General Finance, Robert Ellison, DDS, Northeast Medical Associates, American Health Fitness Center in the following amounts: $3,350.16; $737.27; $261.98; and $558.00. Notice of the motion has been given to the lienholders and there have been no objections thereto. Despite the fact that there have been no objections, the court concludes that the debtor’s motion may only be granted in part.
Not every judicial lien upon exempt property may be avoided. Lien avoidance pursuant to § 522(f)(1) is available only where the judicial lien impairs a claimed exemption. The concept of impairment was reduced to a mathematical formula by the amendments to § 522(f) promulgated by the Bankruptcy Reform Act of 1994. 11 U.S.C. § 522(f)(2)(A); In re Thomsen,181 B.R. 1013, 1015 (Bankr. M.D. Ga. 1995). When the amount due on account of the lien sought to be avoided, all other liens on the property, and the amount of the debtor’s exemption, “exceeds the value that the debtor’s interest in the property would have in the absence of any liens,” the debtor’s exemption is impaired. 11 U.S.C. § 522(f)(2)(A)(i) thru (iii).
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The analysis of lien avoidance under § 522(f)(1) can be viewed as an attempt to replicate the results of a hypothetical sale of the property in question. The value of the property would represent the proceeds from such sale, and is distributed to the various lienholders and the debtor according to the priority of their respective interests. Since consensual liens are generally superior to judicial liens, they would be paid first. Since the entire purpose of an exemption is to protect property from creditors, a debtor’s exemption is superior to the judicial liens. Accordingly, the claimed exemption is fully satisfied before any distribution to judicial lienholders. To the extent funds remain, judicial lienholders receive the remaining proceeds, in accordance with the relative priority of their liens. Once the sale proceeds are exhausted, any lienholder that remains unpaid receives nothing.
Section 522(f)(1) attempts to accomplish essentially the same type of result; but, instead of actually distributing money, the court fixes the amount of the lien holder’s interest based upon what, if anything, it would have received from the hypothetical sale. Consequently, the steps followed in determining whether to avoid a judicial lien are:
1. Determine the value of the property subject to the judicial lien;
2. Deduct the amount of all liens not to be avoided from (1);
3. Deduct the debtor’s allowable exemptions from (2);
4. Avoidance of all judicial liens results unless (3) is a positive figure; and
5. If (3) does result in a positive figure, to that extent, the liens cannot be avoided.
In re Silveira, 141 F.3d 34 (1st Cir. 1998). See also, In reFinn, 211 B.R. 780 (1st Cir. BAP 1997); In re Lindsey,313 B.R. 390, 394-95 (Bankr. W.D. Penn. 2004).
According to the debtor’s motion, the fair market value of the property is $62,500. The
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amount due on account of all non-avoidable liens (mortgage) is placed at $52,447.44. Subtracting this amount from the property’s stated value leaves $10,052.56. This is the amount of money that would be available for distribution on account of both debtor’s claimed exemption and the judicial liens. Subtracting the debtor’s claimed exemption of $7,500 from $10,052.56 leaves $2,552.56. This is the amount of money that would be available for distribution on account of the judicial liens after the debtor’s claimed exemption had been fully satisfied. Consequently, the debtor’s motion may only be granted in part. Based upon the allegations contained in the motion, the most senior judicial lien is the one held by American General Finance, which was obtained on February 11, 2002, and secures the sum of $3,350.16. The amount due on account of this lien exceeds what would theoretically be available for distribution and, thus, the lien may be avoided to the extent it secures an amount in excess of $2,552.56. Nothing would remain for distribution on account of the judicial liens held by Robert Ellison, DDS, Northeast Medical Associates, and American Health Fitness Center and they may be avoided in their entirety. An appropriate order will be entered.
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