Avoidance of Liens on Household Goods, Business Equipment, etc


In most instances, a bankruptcy will  discharge the obligation to pay a debt, but liens (such as house mortgages, auto liens, IRS liens) will remain after a chapter 7 bankruptcy is complete.  In a chapter 13, the debtor must either pay for the collateral through the plan or surrender the collateral.

However, there are a few instances in which a lien can be avoided.  When this happens the lien no longer attaches to the collateral.  The most common instance in which a lien is avoided is when non-purchase money liens on household goods are avoided.  Below we explain what household goods and other personal property such as jewelry, musical instruments and business equipment can be avoided.

If a lien on these items is avoided, that means that the debtor can discharge his/her obligation to pay the debt and he/she can retain the item or items without paying for them.

A.    Avoiding liens on household goods and other consumer personal property. To determine on what items liens can be avoided, you must first look to Mississippi law to determine what is exempt (assuming that the debtor has resided in Mississippi for the 2 years immediately preceding the Petition Date).  Once you determine that an item is an item is exempt, then you look to the Bankruptcy Code to determine if the lien can be avoided on those exempt items:  provides on what items we can avoid the lien provided state law provides that the item is exempt.  11 USC § 522(f)(1)(B) states that a nonpossessory, nonpurchase money lien can be avoided on the following items:

(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or
(iii) professionally prescribed health aids for the debtor or a dependent of the debtor.

1.     What items of consumer personal property are exempt under state law?

§ 85-3-1(a) sets out what is exempt, stating:

(1) Tangible personal property of the following kinds selected by the debtor, not exceeding Ten Thousand Dollars ($10,000.00) in cumulative value:

(i) Household goods, wearing apparel, books, animals or crops;
(ii) Motor vehicles;
(iii) Implements, professional books or tools of the trade;
(iv) Cash on hand;
(v) Professionally prescribed health aids;
(vi) Any items of tangible personal property worth less than Two Hundred Dollars ($200.00) each.

Household goods, as used in this paragraph (a), means clothing, furniture, appliances, one (1) radio and one (1) television, one (1) firearm, one (1) lawnmower, linens, china, crockery, kitchenware, and personal effects (including wedding rings) of the debtor and his dependents; however, works of art, electronic entertainment equipment (except one (1) television and one (1) radio), jewelry (other than wedding rings), and items acquired as antiques are not included within the scope of the term “household goods.”

Based upon this section, a debtor can exempt one TV, without regard to price, then can exempt 2nd, 3rd, and other TVs provided each of them is worth less than $200.00.  The same applies to lawnmowers and firearms.  The first one of each of these items can be exempt without regard to value other than the total $10,000.00 cap for all household goods, while other items in these categories can also be exempt provided the value is less than $200.00.

In the Northern district, the Court has ruled that a stereo can be exempt as a radio, provided it has a radio component.   Thus, the $200.00 value limitation will not apply to the first stereo with a radio component and that items such as a computer is a household good and thus the same limitation does not apply.

This writer is not aware of any decision made by any of the judges in the state of Mississippi that has determined when an system is purchased (such as a stereo system or computer system) that the entire system be worth less than $200.00.  I have always taken the position that the limit applies to each item within the system, since the statute states “any items of tangible personal property worth less than Two Hundred Dollars ($200.00) each.” § 85-3-1(a)(vi).

2.    Of the exempt property, on what items can the lien be avoided?

The bankruptcy code defines the items that can be exempt under subsection (2)(B), 4(A) and 4(B) of 11 U.S.C. § 522(f).  First subsection (f)(1)(B) states:

(f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a 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 under subsection (b) of this section, if such lien is–
(B) a nonpossessory, nonpurchase-money security interest in any–
(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

Then subsections (4)(A) & (B) further define what is a household good under bankruptcy  law.

(4)    (A) Subject to subparagraph (B), for purposes of paragraph (1)(B), the term “household goods” means–
(i) clothing;
(ii) furniture;
(iii) appliances;
(iv) 1 radio;
(v) 1 television;
(vi) 1 VCR;
(vii) linens;
(viii) china;
(ix) crockery;
(x) kitchenware;
(xi) educational materials and educational equipment primarily for the use of minor dependent children of the debtor;
(xii) medical equipment and supplies;
(xiii) furniture exclusively for the use of minor children, or elderly or disabled dependents of the debtor;
(xiv) personal effects (including the toys and hobby equipment of minor dependent children and wedding rings) of the debtor and the dependents of the debtor; and
(xv) 1 personal computer and related equipment.

(B) The term “household goods” does not include–
(i) works of art (unless by or of the debtor, or any relative of the debtor);
(ii) electronic entertainment equipment with a fair market value of more than $550 in the aggregate (except 1 television, 1 radio, and 1 VCR);
(iii) items acquired as antiques with a fair market value of more than $550 in the aggregate;
(iv) jewelry with a fair market value of more than $550 in the aggregate (except wedding rings); and
(v) a computer (except as otherwise provided for in this section), motor vehicle (including a tractor or lawn tractor), boat, or a motorized recreational device, conveyance, vehicle, watercraft, or aircraft.

Thus, a debtor would be able to exempt a lawn tractor under Mississippi Law, but not be able to avoid it under Bankruptcy law, because (4)(B)(v) specifically provides that we cannot exempt that item.  However, even though Mississippi law defines a 2nd TV as not being a household good and we have to exempt under the less than $200.00 provision, Bankruptcy law allows us to exempt it and does define it as a household good (see (4)(B)(ii) that allows a debtor to avoid up to $650.00 in items of electronic entertainment equipment above the first TV, VCR an radio as household goods.

Remember that every third year in April, the limitations in value under the Bankruptcy Code change. 11 U.S.C. § 104. For example, the $650.00 limitation in value was $500.00 when BABCPA took effect on October 17, 2005.

Another point to remember is that if your client has moved to Mississippi within the last two years and he/she is able to use Federal Exemptions or other exemptions, items such as a computer may exempt without regard to the $200.00 limitation because of the wild card exemption under 11 U.S.C. § 522(d) and many state exemption provisions.

Finally, the Bankruptcy Code allows avoidance of liens on animals, crops, musical instruments, or jewelry for personal or household use and Mississippi law provides that books, animals or crops are exempt.   Thus, my opinion (for what it is worth) a garden tiller used to raise a garden for the family would be exempt and avoidable and the $200.00 limitation should not apply.  However, to avoid liens on musical instruments and jewelry other than wedding rings, the $200.00 limit does apply.

B.    Avoiding liens on business equipment or tools of the trade. Most debtors attorney’s automatically think about avoiding liens on household goods but forget that a debtor can also avoid liens on “implements, professional books, or tools of trade of the debtor or of the trade of a dependent of the debtor.”  11 U.S.C. § 522(f)(1)(B)(ii).

As with household goods, the implements, books or tools of the trade must be exempt first to be able to avoid the lien.  But as can be seen above, the only limit to exempting the items is the $10,000.00 aggregate limit for personal property.

However, under the Bankruptcy Code, there is a limit to the amount of implements, tools of the trade, etc. on which a lien can be avoided.  That limit at the present time is $6,225.00.  11 U.S.C. §§ 522(f)(3) & 104.

As with household goods, the exemption limits may be different if the debtor has not lived in Mississippi for the past two years as of the date of the filing of the case.

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