Filing Chapter 13 Bankruptcy: Lien Stripping

When filing Chapter 13 bankruptcy, individuals are asking the court to help them to either reorganized debt or to discharge some of that debt, so as to allow the individual a fresh start financially. One of the areas many property owners are struggling with is the reduced value of his or her home. When the value of the home falls, the lien becomes upside down. In some cases, filing bankruptcy can help an individual to fix this problem.

Secured Debts in Chapter 13 Bankruptcy

When an individual files for bankruptcy, all secured and priority debts are often paid in full through the debt repayment plan, except for a first mortgage which continues to be repaid outside of the courts. However, there are some situations where lien stripping can occur. Consider what may happen in this situation.

• The property owner has two mortgages on a home, a first mortgage and second mortgage.
• He or she wants to stay in the property and are up to date on payments for the first mortgage. The second mortgage debt is not caught up.
• The court will determine the value of the property. If the court finds that the property is worth less than the first and second mortgages combined, the first mortgage remains intact, but the second mortgage may be treated as unsecured debt.
• In some cases, individuals will receive a discharge for the second mortgage since it is no longer secured. This removal of the second mortgage is called lien stripping.
• In some situations, the debt is discharged, which means the borrower does not have to repay it through the process. However, if it is considered a priority debt, it will be paid over a period of three to five years with similar types of debts.

If the property is significantly behind on payments, or if there is enough value to cover the property, this process may not happen. Rather, the lender may wish to continue foreclosure proceedings or the borrower will need to keep paying towards both loans until both debts are paid off as agreed.

Complexity Means Hiring an Attorney

For those considering lien stripping with filing Chapter 13 bankruptcy, it is critical to work with an attorney. The attorney will help the individual to determine what his or her goals are financially as well as what options are available to protect assets. In some cases, a Chapter 13 bankruptcy attorney can help the individual to save money and protect his or her assets.