Using Lien Stripping to Reduce Secured Debt in Chapter 13
In a Chapter 13 bankruptcy, unsecured debts are discharged after successful completion of a partial repayment plan. However, secured debts — those based on mortgages and other liens — remain in force. Fortunately, there is procedure called lien stripping that allows you to convert some mortgage debts to unsecured ones and thus to discharge them.
Lien stripping refers to removing junior liens from your principal residence, such as second mortgages or home equity lines of credit. The remedy provides a way for you to keep your home by scaling down secured debt to the property’s fair market value.
The rationale for lien stripping is that these junior liens are essentially unenforceable. A homeowner often owes more on their 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 — and certainly not enough to pay off any second or third mortgages, which are subordinate to the primary.
For example, assume that in addition to your first mortgage, which is equal to or greater than the home’s fair market value, you owe $100,000 on a second mortgage and $75,000 on a home equity loan. In a Chapter 13 bankruptcy, you might be able to strip the $175,000 in junior liens. While the underlying loans remain valid, they are reduced to unsecured debts.
In a Chapter 13 bankruptcy, stripped liens are typically treated the same way as any other unsecured debt. They are included in the debtor’s 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 back on a firm financial footing. Our experienced bankruptcy lawyers are here to help. Contact us online or give us a call at 310-271-6223 to schedule a consultation.