Advantages of Lien Stripping in Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a procedure for steady wage earners to reorganize their heavy debt by paying off a portion of it over time. A structured repayment plan proposed by the debtor is approved by the court and managed by an appointed trustee. It provides a way to reduce debt burdens, lower monthly payments, preserve assets and ultimately achieve financial freedom.
Although a Chapter 13 plan does not apply to secured debts like mortgages, which remain in force, there is a process known as lien stripping that can provide some measure of relief. Lien stripping means removing junior liens from your principal residence, such as second mortgages or home equity lines of credit. The rationale is that these junior liens are essentially unenforceable. A homeowner often owes more on mortgages than their home is worth. This means that the fair market value of the home may not be enough even to satisfy the balance of the primary mortgage, let alone any second or third mortgages, which are subordinate to the first one.
Lien stripping allows you to scale down your secured debt to the fair market value of the collateral. For example, let’s say you own a home valued at $200,000 and have a first mortgage with a balance of $220,000. You also have a secured home equity loan with a balance of $50,000. By filing Chapter 13 bankruptcy, you can strip the second mortgage lien as it is entirely unsecured. After successfully completing your Chapter 13 repayment plan, you emerge owning your home with only the first mortgage to repay, effectively reducing her total debt obligation.
The underlying loans remain valid but are treated the same way as any other unsecured debt in a Chapter 13 bankruptcy. They are included in your repayment plan, so that they are partially paid off over a three- to five-year period. Although your first mortgage remains in force, any arrearages that exist at the time the Chapter 13 petition is filed are also included in the plan. Once the plan is completed, the remainder of the unsecured debt is discharged.
At the Law Offices of Michael Jay Berger, we help clients navigate the Chapter 13 bankruptcy process, which can allow you to keep your home while you restructure your debt and get a fresh financial start. Our experienced bankruptcy lawyers are here to help. Contact us online or give us a call at 310-271-6223 to schedule a consultation.
