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Is a Judgment Lien Extinguished When the Personal Debt in Issue is Discharged in Bankruptcy (Revisited)?

In Texas, recordation of an abstract of judgment in the real property records of the county in which a debtor has real property creates a lien in favor of the creditor against such property.  Texas law further provides, that a “judgment is discharged and any abstract of judgment or judgment lien is cancelled and released without further action in any court and may not be enforced if: (1) the lien is against real property owned by the debtor before a petition for relief is filed under federal bankruptcy law and (2) the debt or obligation evidenced by the judgment is discharged in bankruptcy.” Tex. Prop. Code § 52.042.  The Texas Property Code further adds that a “judgment lien is not affected by this subchapter and may be enforced if the lien is against real property owned by the debtor before a petition for relief was filed under federal bankruptcy law and (1) the debt or obligation evidenced by the judgment is not discharged in bankruptcy; or (2) the property is not exempted in the bankruptcy and is abandoned during the bankruptcy.” Id. § 52.043.  Discharge of a debt in bankruptcy is “the release of a debtor from all of his debts which are provable in bankruptcy.” Black’s Law Dictionary 463 (6th ed. 1991).  Importantly, discharge in bankruptcy does not extinguish the debt; rather it removes any remedy that may be had against the person of the debtor (in personam) which the creditor had prior to the filing of the bankruptcy case and leaves in place the remedies which the creditor has against the property of the debtor (in rem).  Stated another way, properly perfected liens pass through bankruptcy.  But personal liability claims against the individual do not.  So, what impact does this have on section 52.042 of the Texas Property Code?  None. At least one Texas state court has ruled on the issue.  In Moser v. Schachar (In re Thaw), the Fifth Circuit held that Section 52.042 acts on the status of any liens against the land or assets held by the debtor after the bankruptcy process has come to a close.  The statute reads that a lien is discharged “without further action in any court” once the debt is discharged in bankruptcy.  The judgment lienholders status is not affected during the bankruptcy but only after the bankruptcy.  Section 52.042 was enacted to assist debtors, post-bankruptcy, with regard to real property burdened by liens in county records, and not to affect lien rights in bankruptcy.  The statute is not permitted to be used by a Chapter 7 debtor as a basis for challenging secured creditor status.

Authored by: Bruce W. Akerly, Partner

Melissa Ditto