Lien Stripping in Bankruptcy

Lien Stripping in Bankruptcy

In times of financial difficulty, it’s common to look for ways to minimize your monetary stress. One of the directions that some people turn towards is bankruptcy. In bankruptcy, you essentially declare yourself without money and are unable to repay your debts. Depending on the type of bankruptcy that you decide to file, the majority of your assets can be liquidated to consolidate your debt. However, in some situations, exemptions are allowed. Such exemptions may be towards your requirements for living and restarting such as your home. But what if you have a mortgage? You may be able to reduce your debts through something called lien stripping.

What is a Lien?

When you go to purchase a home but don’t have all of the money to put down upfront, a mortgage is often required. Mortgages are a type of loan that allows a buyer to purchase their home by borrowing money from a creditor. These are then paid back, often monthly, on a recurring schedule until the total and interest is collected. In most, if not all, cases of mortgage, the creditor will place a lien on the home. A lien is essentially a claim on the property for the unpaid portion of the loan amount. With a lien in place, the borrower cannot legally sell or transfer ownership of the home. In some cases, people may take out second mortgages, or second liens, on their homes as well if the first mortgage doesn’t fully cover the amount of money that they need to cover their expenses.

What is Lien Stripping?

When you have a lien or two but you’re in debt and looking to file bankruptcy, there might be an option called lien stripping available to you. Lien stripping, as the name suggests, essentially allows you to eliminate a mortgage lien. Priority is given based on when the liens were recorded. Your first lien is considered the senior lien, while your second lien is called the junior lien. With lien stripping, only your junior lien is impacted. Therefore, this can only apply if you have two liens. When the lien is stripped during bankruptcy, it changes its status from secured to unsecured status. This means that the value of the mortgage changes from the entire mortgage taken out to the depreciation value of the property. This is a process available to you when you are going through Chapter 13 bankruptcy.

How Does Lien Stripping Work?

Lien stripping works for the borrower’s benefit during bankruptcy. In the case of lien stripping, the second lien is converted from a secured to unsecured status meaning only depreciation shall be paid and essentially reduces the debt that the borrower owes. In most situations, lien stripping is only allowed if the senior lien is larger than the fair market value of the property. To explain how lien stripping works, a theoretical example is best. Thus, suppose you have a home worth $375,000. Your first mortgage covers $250,000 and your second mortgage is $125,000. You have a third mortgage worth $50,000. Because the first two senior mortgages cover the price of the fair market value, your third, or the junior lien, may be stripped and determined to be unsecured.

Hire a Bankruptcy Attorney

The process of stripping a lien can be a difficult and confusing process, especially for an individual who isn’t immersed in the bankruptcy industry. For this reason, hiring a bankruptcy attorney could help you mitigate your financial strain with less emotional stress. The attorneys at the Foreclosure Defense Group have over 50 years of combined experience. Call us to schedule a free consultation to discuss how we can help you today!

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