Avoiding Non-possessory Non-purchase-Money Security Interests in Household Goods Under Section 522(f) - What Is Protected

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Sep 1998

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It is common for consumer debtors to borrow money, generally from small loan companies, and grant them a lien in existing household goods to secure repayment of those loans. The liens granted are referred to as "non-possessory non-purchase-money security interests." The Bankruptcy Code deals with these liens under §522(f). Prior to enactment of the Code, Congress made a finding that substantial creditor abuse occurred in the area of these non-possessory, non-purchase-money security interests. s

Prior to the adoption of the Bankruptcy Code, financing companies would take a security interest in property essential to the debtor's survival, not because of the intrinsic value of the collateral, but because of the leverage it gave them in a bankruptcy proceeding. When the debtor filed a petition in bankruptcy, the secured creditor used "the threat of possession, rarely carried out, to extract more than he would be able to if he did foreclose or repossess." See Matter of Noggle, 30 B.R. 303, 305 (Bankr. E.D. Mich. 1983) citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 127 (1977).

The Supreme Court found that the avoiding powers were designed to protect "a debtor's essential needs and to enable him to have a fresh start economically."¹ While Congress was concerned about the debtors receiving a fresh start, it was equally concerned with forcing debtors to reaffirm consumer debts and to maintain the balance between creditors and debtors.² Some courts have said that the personal property exemption should be liberally construed in order to protect debtors.³ However, other courts have held that such definitions of personal property used by the debtor should be given a narrow construction.⁴

Section 522(f)(1)(B) provides for the avoidance by the debtor to the extent that a lien impairs an exemption "if such lien is a non-possessory, non-purchase-money security interest in any—

(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments or jewelry that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor,
(ii) implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor, or
(iii) professionally proscribed health aids for the debtor or a dependent of the debtor."

The courts are substantially split over the application of these provisions to "household furnishings, household goods...that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor." Generally, the term "household goods" is deemed to be "personal property typically found in or around a home and used by the debtor or his dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself."⁵

A collection of cases and the application of the avoiding powers is instructive as to the meaning of "household goods." The following conclusions from the cases reflect some of the conflicts in the meaning of the term:

1. A rifle and shotgun held at a townhouse complex of 25-30 units is not household goods.⁶
2. A lien on a handgun used in defense in protection of the home was avoidable.⁷
3. A stereo, aquarium and camcorder are household goods.⁸
4. Fishing rods, sleeping bags, tents, tools and a camera are not household goods.⁹
5. Camera and accessories and a video cassette recorder are household goods.¹⁰
6. A riding lawn mower was not a household good.¹¹
7. Stereo and VCR are household goods.¹²
8. Antique furniture and television set were household goods.¹³
9. Television, video camera, VCR, telephones, home computer and software were household goods.¹⁴
10. A bicycle qualified as household goods.¹⁵
11. Bicycle and 35mm camera were deemed not to be household goods.¹⁶
12. Guns, swimming pool and sporting knives were not subject to lien avoidance; however, a television, VCR, computer, stereo, CB radio, tools, lawn equipment, luggage, grill, hobby equipment, phone, swing set and auto repair equipment were household goods.¹⁷
13. A mobile home was a residence and not a household good.¹⁸
14. A home is not a household good but rather is a residence and, therefore, a second deed of trust could not be avoided.¹⁹
15. A water softener qualified as a household good.²⁰

It is difficult to draw up a comprehensive list since typical items found in and around the home to facilitate day-to-day living may vary from location to location and certainly change with technological improvements. Who knows what technology may come up with next that will become part of the everyday household? With regard to certain items, though, a case-by-case analysis must be made. With regard to other items, a common sense approach can be taken.