Impairment of exemption occurs when a lien, in combination with other liens and the amount a debtor may claim as exempt, exceeds the value of property.
For example, if a debtor's home is worth $200,000; the debtor is entitled to a $35,000 homestead exemption, and the home is subject to a mortgage of $150,000, a lien that exceeds $15,000 impairs the debtor's homestead exemption. Once the mortgage was paid off, there wouldn't be enough equity left to pay both the exemption and the lien.
Impairment of exemption has been defined in different federal and state statutes. For example, 11 USC § 522 (f)(2)(A) provides that “a lien shall be considered to impair an exemption to the extent that the sum of-
(i) the lien;
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could claim if there were no liens on the property.”
The determination of impairment of exemption came before the US Supreme Court in Owen v. Owen, 500 U.S. 305. The Supreme Court held that to determine application of a bankruptcy lien avoidance provision, the bankruptcy court should “ask not whether the lien impairs exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which debtor would have been entitled under applicable state or federal law but for the lien itself.” A similar reasoning was adopted by the Eleventh Circuit in In Re Sanders, 39 F.3d 258, wherein it was determined that whether a provision of the Bankruptcy Code authorizing the debtor to avoid a lien to the extent that it impairs exemption, a court must apply a three-step process:
- Whether the debtor is entitled to an exemption;
- The extent to which the lien may be avoided;
- Whether the lien does, in fact, impair an exemption.
[Last updated in April of 2022 by the Wex Definitions Team]