DISCHARGEABILITY PROVISIONS OF THE BANKRUPTCY CODE DO NOT GOVERN THE QUESTION OF WHETHER A JUDGMENT IS AVOIDABLE UNDER THE BANKRUPTCY CODE, UNLESS THE DEBT COMES WITHIN THE DEBTS CONGRESS SPECIFICALLY EXCEPTED FROM SECTION 522(C)
In In re Desai, 2005 Bankr. Lexis 1387 (Bankr. M.D. Fla. July 20, 2005), the issue before the bankruptcy court was whether the City of Altamonte Springs' lien, obtained by virtue of a Final Judgment and filed against the debtor's homestead, was avoidable. The bankruptcy court held that it was.
On November 26, 2003, the City of Altamonte Springs, a municipal government entity, obtained a judgment against the debtors for $ 1,000 bearing interest at 6% per annum, arising from numerous false alarms which occurred at the debtor's homestead property over a six month period. The debtors filed for relief under Chapter 7 of the Bankruptcy Code on April 15, 2005, and the property at issue is claimed as exempt in Schedule C of the petition. The debtor argues that the City's judgment encumbers the exempt homestead property and should be avoided. The City claimed that 11 U.S.C. § 523(a)(19)(B)(i) rendered their judgment, a judgment owed to a municipality, nondischargeable. Furthermore, the City argued that the judgment was against the debtors personally and not related to the real property. Next, the City argued that § 522(f)(1) provides for release of debts only specific to real property being exempted by debtors. Finally, the City argued § 522(d)(1) restricts the exemption to $15,000 while the debtors have alleged the property to be worth $140,000.00, and that by allowing the lien, the exemption would not be impaired.
At the outset of its legal analysis, the bankruptcy court cited 11 U.S.C. § 522(f)(1), and found that "[a]s the City obtained a judgment against the debtors, the lien is judicial. The court then stated that "[i]n order to determine whether the lien impairs an exemption to which the debtor would have been entitled and whether the lien is fixed against an interest of the debtor, one must look to Article X, Section 4, of the Florida Constitution which provides that homestead property 'shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, exceptfor payment of taxes, and assessments thereon, obligations contracted for the purchase, improvement, or repair thereof, or obligations contracted for ...labor performed on the realty...'" If a judgment lien meets the above stated criteria, such lien is unenforceable on Florida homestead real property from the time the property acquires the status of homestead until the property loses its homestead status.
As the bankruptcy court noted, even though the City's lien was technically unenforceable by virtue of the Florida Constitution, any such lien still creates a cloud on the title by the fact the lien was recorded in the public records. It is well-settled that the recordation of even an unenforceable lien is sufficient to impair the debtor's homestead exemption and fix against the interest of the debtor.
Overall, the court held that "[t]he dischargeability provisions of the Bankruptcy Code do not govern the question of whether a judgment is avoidable under the Bankruptcy Code, unless the debt comes within the debts Congress specifically excepted from Section 522(c), none of which apply to this case." (citations omitted). Further, "Section 522(c) does not require a judgment lien for a debt that is specifically related to the property, nor limit the debtors to the federal exemption since Florida has opted out of the federal exemption." (citations omitted). Accordingly, the court held that the City's lien was avoidable.