The lien strip in Chapter 13 bankruptcy can remove a lien guaranteeing a loan against your real property. The lien strip reclassifies the second mortgage or home equity line of credit (“HELOC”) from secured debt to unsecured debt. Lien stripping sometimes allows bankruptcy debtors to keep their homes. Most Chapter 13 lien strips also allow you to repay less than 100 percent of the balance due on these loans.
What is the Lien Strip?
A lien is a security interest in an asset guaranteeing a loan. We call these types of debts “secured” because the lender can take possession of the asset if you default on the loan. In this way, secured debts are very different from unsecured debts like credit cards. Secured debts usually have lower interest rates because lenders take on less risk with these loans. Mortgages and car loans, for example, are secured debts. The lender can foreclose on the property or repossess the car if you stop making payments.
When you file bankruptcy, you must get current and stay current on secured loans. Otherwise, you must surrender (or give up) the collateral. To keep your house, in other words, you must continue (or start) to pay your secured loans once you file bankruptcy.
The lien strip in Chapter 13 bankruptcy, however, provides an exception to this rule.
How Does the Lien Strip Work?
If you have a second mortgage or HELOC, but a sale of your property would not generate funds sufficient to repay the first mortgage, then all secondary liens are considered undersecured. If your home, in other words, isn’t worth the first mortgage, then we can reclassify junior liens as unsecured. For example, say your your home is worth $275,000, and you owe $300,000 on the first mortgage and $25,000 on the second mortgage. If the first lender were to hold a foreclosure auction, the sale would not generate enough money to repay the first mortgage.
Under this scenario, the second mortgage is legally a secured lien, but in reality, the debt is actually unsecured. The lien strip in Chapter 13 bankruptcy “strips” the lien from the property. And the debt is reclassified as what it actually is: unsecured.
Once we reclassify the debt as unsecured, we can include it in your Chapter 13 repayment plan. The plan, once confirmed, allows you to repay unsecured creditors over a period of three to five years. At the end of your repayment plan, any remaining debt balance is discharged. You will be allowed to keep your home without paying the second mortgage in full as would normally be required.
Discuss Your Lien Strip Options with a Bankruptcy Attorney
The process of obtaining a lien strip in Chapter 13 bankruptcy is complex. Do not attempt to obtain a lien strip on your own. The pre-filing notice and evidentiary requirements fully justify hiring an attorney to accomplish this for you. There are obvious, immense benefits to the lien strip, but it is not available to everyone. Nor is the lien strip appropriate in every situation. A qualified bankruptcy attorney can help you to assess whether the lien strip in Chapter 13 bankruptcy would benefit you.