You try adjusting payments. You write letters. You make phone calls. You negotiate. But the liens just won’t go away.
You would even consider bankruptcy, but everyone knows the old saying: “Liens pass through bankruptcy unchanged.”[1]
So what’s a farmer, tradesperson, or rural family supposed to do?
Don’t Despair
Now there’s Miracle Lien Avoidance.TM
Well, not really.
But there is a surprisingly powerful provision of the bankruptcy code that many lawyers overlook or are not aware of.
The general rule is indeed that valid liens survive bankruptcy.[2] A discharge eliminates personal liability, but it usually does not eliminate a creditor’s lien against collateral. If a bank has a properly perfected lien on a tractor before bankruptcy, the lien generally remains attached to the tractor after bankruptcy.
However, Congress created an important exception. Under certain circumstances, debtors may avoid a nonpossessory, nonpurchase-money security interest in exempt property.[3]
For farmers and rural debtors, that exception can sometimes produce dramatic results.
The Three Requirements
To avoid a lien under 11 U.S.C. section 522(f), the debtor must generally establish three things:
- The property is exempt.
- The creditor holds a nonpossessory, nonpurchase-money security interest.
- The lien impairs the exemption.[4]
The statutory language sounds technical, but the concept is fairly simple: If a creditor has a blanket lien covering exempt tools or equipment, and the creditor did not finance the purchase of those items, the lien may be avoidable.
Purchase-money Versus Nonpurchase-money Liens
This distinction matters.
Suppose a lender finances the purchase of a new tractor and takes a security interest in that tractor. That is a classic purchase-money security interest. Section 522(f) does not allow avoidance of that lien.[5]
On the other hand, suppose the farmer later signs a blanket security agreement granting the lender a lien on all equipment, tools, inventory, farm products, and after-acquired property to secure an operating loan. That lien may be nonpurchase-money as to many assets — and therefore may be subject to avoidance.[6]
Tools of the Trade: A Powerful Tool for Farmers
For many Wisconsin farmers, the key question is whether farm equipment qualifies as tools of the trade.
Generally, the answer is yes.
In In re Immel, the Bankruptcy Court for the Eastern District of Wisconsin addressed lien avoidance involving farm equipment claimed exempt under Wisconsin’s tools of the trade exemption.[7] The court recognized that farm equipment can constitute implements or tools of the trade for purposes of section 522(f).
Wisconsin provides a $15,000 per debtor exemption for equipment, inventory, farm products, and professional books used in the debtor’s business.[8] For many farmer-debtors, this exemption can become the foundation for a lien avoidance motion.
The practical result is that a debtor may be able to remove a blanket lender’s nonpurchase-money lien from otherwise exempt farm equipment while retaining the equipment needed to continue earning a living.
What Exactly Is a ‘Tool of the Trade’?
The phrase “tool of the trade” often conjures images of a mechanic’s wrench set or a carpenter’s toolbox. In bankruptcy, however, the concept is considerably broader.
For farmers, “tools of the trade” can include tractors, combines,[9] planters, tillage equipment, skid loaders, livestock equipment, milking equipment, and other items[10] reasonably necessary to carry on the debtor’s farming operation. Courts generally focus less on whether an item looks like a traditional “tool” and more on whether it is genuinely used in the debtor’s income-producing activities.
The Western District of Wisconsin illustrated this functional approach in Nowak,[11] holding that an ordinary automobile does not qualify as a tool of the trade, while distinguishing farm implements and cab tractors, which courts have treated as tools of the trade precisely because they are implements commonly used by persons in the debtor’s occupation.[12]
This functional test extends well beyond farm machinery: a semi-tractor is a tool of trade for a truck driver,[13] a specialized van outfitted for floor buffing has qualified for a floor refinishing business, and even a microwave oven has been admitted under the section 522(f) exemption.[14]
Livestock presents a more contested question. While one court treated dairy cows as specialized tools of the dairy trade,[15] the Seventh Circuit in Patterson[16] reached the opposite conclusion, characterizing livestock as capital assets rather than tools of the trade — and drawing a sharp line between the animals themselves and the equipment used to tend them.
The purpose of the exemption is practical. Bankruptcy is intended to provide a fresh start, not to leave the debtor unable to earn a living.[17] As a result, courts frequently interpret the term broadly enough to preserve the means by which a debtor supports himself or herself.
It Does Not Have to Be the Debtor’s Only Trade
One misconception is that the debtor must be engaged in the activity full time or that it must be the debtor’s principal occupation.
That is not the law: a debtor does not need to farm full time and farming need not be the debtor’s principal occupation or largest source of income in order to claim tools of the trade.[18]
Many debtors, especially in rural Wisconsin, wear multiple hats. A debtor may farm part time while working at a factory, driving a truck, teaching school, or working in construction. Another may operate a small cattle operation while holding a full-time off-farm job.
The relevant question is usually not whether the activity is the debtor’s primary source of income. Rather, the inquiry is whether the debtor is legitimately engaged in the trade and whether the property is used in that trade — dairy cows, for instance, have been recognized as tools of the trade of dairy farming on exactly this basis.[19]
Courts have generally required that the debtor be actively engaged in the trade as of the petition date, but they have recognized an exception where the debtor has only temporarily ceased the trade and can show a reasonable prospect of reengaging in it. Applying that exception, one Wisconsin court allowed a debtor who was not actively farming on the petition date to avoid a nonpurchase-money lien on a tractor under section 522(f)(2)(B), because the debtor could demonstrate a reasonable prospect of returning to farming.[20]
This distinction is particularly important for modern family farmers. It is increasingly common for farming operations to depend upon substantial off-farm income. Taking other employment does not necessarily mean a farmer has abandoned farming: courts have held that a farmer forced by financial difficulty to take other work is not treated as having abandoned farming where the debtor intended to return to farming once financially able.[21]
A creditor’s argument that equipment is not a “tool of the trade” simply because farming is not the debtor’s largest source of income should be viewed with skepticism.
How Much Business Activity Is Enough?
Unfortunately, there is no bright-line rule.
Courts generally look for evidence that the debtor is actually engaged in the trade and has more than a speculative hope of future activity. Factors that courts may consider include:
- the debtor’s history in the trade;
- whether the debtor currently earns income from the activity;
- the amount of time devoted to the activity;
- the debtor’s intent to continue in the trade;
- whether the equipment is actually used in the business; and
- whether the operation is conducted with some degree of regularity or continuity.
A hobby usually is not enough. On the other hand, the trade need not generate a full-time income, nor must it be highly profitable.
For example, a debtor who owns a modest herd of cattle, regularly sells livestock, maintains fencing and feeding equipment, and intends to continue farming may have a far stronger argument than a debtor who simply owns unused equipment and vaguely hopes to start farming someday.
Who has the Burden of Proof?
The debtor does.
The party seeking lien avoidance bears the burden of establishing the elements required under section 522(f).[22]
That means counsel should be prepared to present evidence showing:
- The debtor properly claimed the exemption.
- The property qualifies as tools of the trade or household goods.
- The creditor’s lien is nonpossessory.
- The lien is nonpurchase-money.
- The exemption is impaired by the lien.
In many cases, the evidence is straightforward and can be established through bankruptcy schedules, security agreements, loan documents, and a supporting affidavit.
‘I Forgot to Avoid the Lien’ — Now What?
One of the most common scenarios occurs after the bankruptcy case is over.
The debtor receives a discharge. The case closes.
Months later, perhaps while trying to sell equipment or refinance property, someone discovers that a lien that could have been avoided was never addressed.
Is it too late? Usually not.
Bankruptcy courts routinely permit debtors to reopen closed cases to pursue lien avoidance under section 522(f).[23] Bankruptcy Code section 350(b) expressly authorizes reopening a case “to administer assets, to accord relief to the debtor, or for other cause.”[24]
Many courts have concluded that reopening a case to avoid an otherwise avoidable lien is entirely appropriate, particularly where creditors suffer no prejudice from the delay.[25]
Accordingly, lawyers reviewing old bankruptcy files should not automatically assume that a missed lien avoidance opportunity is lost forever. Sometimes the cure is as simple as filing a motion to reopen and then filing the lien avoidance motion that should have been filed originally.
So now you are ready to help your clients avoid liens and enhance their fresh start with valuable assets to help them earn income.
But Wait, There’s More
Miracle Lien Avoidance applies to consumers as well.
Many finance companies historically took security interests in household goods to secure consolidation loans or other lending arrangements. Those are precisely the types of liens Congress had in mind when creating section 522(f).[26]
Household Goods: Not Just for Urban Debtors
Farm cases often involve equipment, but rural debtors should not overlook household goods.
Section 522(f) expressly authorizes avoidance of up to $8,575 nonpurchase-money security interests in household furnishings, appliances, clothing, books, animals, crops, musical instruments, and other goods held primarily for personal, family, or household use.[27]
Wisconsin provides $12,000 exemptions for household goods and furnishings, and federal exemptions likewise contain protections for household property.[28]
As a practical matter, most lenders no longer focus heavily on household goods liens. But the occasional old-fashioned blanket security agreement still appears, particularly in older consumer lending situations.
When it does, lien avoidance may provide a useful remedy.
Practice Tips
When interviewing a farmer or other rural debtor, do not stop at asking whether property is encumbered.
Ask:
- How was the original loan made?
- Did the lender finance the purchase of the equipment?
- Is the lien part of a later operating loan or blanket security agreement?
- What property is being claimed exempt?
- Is the equipment used as a trade or business of the debtor?
These questions can uncover lien avoidance opportunities that substantially improve the debtor’s fresh start.
Conclusion
The old saying remains mostly true: liens generally survive bankruptcy. But Wisconsin farmers, tradespeople, and rural families, section 522(f) can remove certain nonpurchase-money liens from exempt tools of the trade and household goods. A carefully prepared motion may turn a blanket lender’s secured claim into an unsecured one, at least as to exempt property.
And if the opportunity was missed the first time around, reopening the case may still be available.
So the next time a client complains about those irritating liens attached to everything from tractors to toolboxes to kitchen appliances, remember:
Ask your insolvency lawyer if Miracle Lien Avoidance is right for you.
Special thanks to Atty. Ann Wang for her help in putting this article together.
This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section web pages to learn more about the benefits of section membership.
Endnotes
[1] In Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991), the court observed that “[o]rdinarily, liens and other secured interests survive bankruptcy.” ↩
[2] In Dewsnup v. Timm, 502 U.S. 410, 417-18 (1992), the court confirmed that this rule predates the Bankruptcy Code and was preserved by Congress when enacting it. ↩
[3] 11 U.S.C. § 522(f)(1)(B). ↩
[4] 11 U.S.C. § 522(f)(1)-(2). ↩
[5] In re Saxe, 491 B.R. 244 (Bankr. W.D. Wis. 2013) (citing Wis. Stat § 409.103; 11 U.S.C. § 522(f)(2)) ↩
[6] See generally 11 U.S.C. § 522(f)(1)(B). ↩
[7] In re Immel, Case No. 17-22036-GMH (Bankr. E.D. Wis. Aug. 2, 2018). See wieb.uscourts.gov, govinfo.gov. ↩
[8] Wis. Stat. § 815.18(3)(b). ↩
[9] In re Thompson, 867 F.2d 416 (7th Cir. 1989). ↩
[10] Such as baler and haybine, In re Erickson, 815 F.2d 1090 (7th Cir. 1987). ↩
[11] In re Nowak, 48 B.R. 290 (W.D. Wis. 1984). ↩
[12] Middleton v. Farmers State Bank of Fosston, 41 B.R. 953 (D.C. 1984). ↩
[13] In Pockat v Thorp Finance Corporation, 6 B.R. 24 (W.D. Wis.1980). ↩
[14] Raasch v Thorp Finance, Adversary No. 81-0552, U.S.B.C. (E.D. Wis. 1981). ↩
[15] In re Cook, 66 B.R. 3 (1985). ↩
[16] In re Patterson, 825 F.2d 1140 (7th Cir. 1987). ↩
[17] Cunningham v. Brictson, 101 Wis. 378, 379-383. ↩
[18] In Matter of Weinbrenner, 53 B.R. 571, 574–75 (Bankr. W.D. Wis. 1985); In re Patterson, 825 F.2d 1140, 1144 (7th Cir. 1987). ↩
[19] In re Cook, supra note 15. ↩
[20] In re Richardson, 47 B.R. 113 (W.D. Wis. 1985) (Martin, J.), following In re Hahn, 5 B.R. 242 (S.D. Iowa 1980), and In re Pommerer, 10 B.R. 935 (D. Minn. 1981). ↩
[21] In In re Brzezinski, 65 B.R. 336, 339 (Bankr. W.D. Wis. 1985). ↩
[22] See Fed. R. Bankr. P. 4003; see also generally 11 U.S.C. § 522(f). ↩
[23] See, e.g., In re Chabot, 992 F.2d 891 (9th Cir. 1993); In re Bianucci, 4 F.3d 526 (7th Cir. 1993). ↩
[24] 11 U.S.C. § 350(b). See also: In re Archdiocese of Milwaukee, 663 B.R. 897 (Bankr. E.D. Wis. 2024); In re Rutherford, 427 B.R. 656 (Bankr. S.D. Ohio 2010) and In re Burns, 306 B.R. 274 (Bankr. E.D. Mo. 2004), citing Dworsky v. Canal Street L.P. (In re Canal Street L.P.), 269 B.R. 375, 381 (8th Cir. BAP 2001). ↩
[25] In re Bianucci, 4 F.3d 526, 528-29 (7th Cir. 1993). ↩
[26] Matter of Richardson, 47 B.R. 113 (W.D. Wis. 1985). ↩
[27] 11 U.S.C. § 522(f)(1)(B)(i). ↩
[28] Wis. Stat. § 815.18(3)(d); 11 U.S.C. § 522(d)(3). ↩
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