- Bankruptcy discharge is the term used to describe a legal action taken by the court to remove a debt completely. Discharges are what gives the debtor release from debt obligations and makes bankruptcy a worthwhile process. However, courts do not discharge all debts. They may sell debtor possessions to pay off some debts or require debtors to pay off on their own. A conventional discharge is not the same as removing a lien. Liens may or may not be discharged by the court.
- Because liens are often based in secured collateral, bankruptcy courts do not usually have the ability to affect them. Unsecured loans that are not backed up by any physical asset are a different matter. Even if the creditor seeks a judgment lien before the bankruptcy, the court will usually discharge unsecured loans if the debtor qualifies for the bankruptcy. However, if the creditor has an asset like the house or automobile to collect value from, the court cannot remove the lien, even if it takes away the lien.
- When it comes to mortgages, which include the most common liens to remain after the bankruptcy, courts may decide to strip liens. This occurs when homeowners have a second mortgage debt on a house, but the value of the house is not enough to pay off the primary mortgage, leaving the second mortgage with a lien but without any real collateral. In this case the court will often decide to strip the lien, or discharge it and remove the loan.
- There are other cases in which the court may protect borrowers from liens or discharge liens, depending on individual circumstances. Personal exemptions to save borrower assets may restrict how much money creditors can collect through a lien. Courts may discharge liens that are secret, or liens that have not been filed properly or liens that have been filed when notification was not sent to the debtor. If the creditor waits too long to notify the debtor, this can disqualify the lien.
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