Lien Avoidance

November 2, 2016

Have you made a business or agricultural loan to an individual in Wisconsin?  Have you secured that loan with a non-purchase money, non-possessory lien on personal property that the debtor uses in his business?  If you answered “yes” to both questions, then you should be aware (or at least reminded) that your debtor can avoid your lien in bankruptcy to the extent that your lien impairs the debtor’s exemptions in implements or tools of the trade. (11 U.S.C. sec. 522(f)(1)(B)(ii)).

Wisconsin now has a $15,000 exemption for business equipment, inventory, farm products and professional books used in the business of the debtor or in the business of a dependent of the debtor. (Wis. Stats. sec. 815.18(3)(b)1.)  A married couple, who are both engaged in the business, can stack this exemption and thereby double the exemption to $30,000.

This means that your non-purchase money, non-possessory lien in implements or tools of the trade can be reduced by $30,000 in a bankruptcy filed by a husband and wife, who use Wisconsin exemptions.

Although the Bankruptcy Code  (11 U.S.C. sec. 522(f)(3)(B)) contains a cap in the amount of $6,425 on lien avoidance for some types of state statutes, which amount is revised every 3 years, a federal district court has held that this cap does not apply to the Wisconsin business exemption.  See In re Ehlen, 207 B.R. 179, 184 (W.D. Wis. 1997).

Keep in mind that only individuals are entitled to exemptions in bankruptcy court.  LLCs and corporations are not entitled to exemptions.  This means that an LLC or corporation cannot avoid your lien under 11 U.S.C. sec. 522(f)(1)(B) because there is no exemption being impaired.  However, of course, an LLC or corporation could try to cram down the value of your collateral, but that’s an article for another day.

The take away here is that when you are valuing your collateral, you need to be aware that a future bankruptcy filing may reduce the value of your non-purchase money, non-possessory lien.

You should be vigilant for debtors who attempt to dissolve their LLC (or transfer their LLC assets to the debtors individually) just prior to filing for bankruptcy.  We have seen debtors take such action to place the assets in their individual names just prior to filing for bankruptcy so that they can take advantage of lien avoidance.  Such action may be a fraudulent transfer and may provide you with a basis to defeat the attempted lien avoidance.

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