One advantage of filing a Chapter 13 bankruptcy that few people are aware of is commonly referred to as the “lien stripping” process. In short, lien stripping allows an individual to strip away a mortgage lien on his/her home that is normally ineligible to be written off. The procedure became more popular when the housing market declined significantly and homeowners were unable to afford their mortgage loans.
When you file a Chapter 13, you create a repayment plan that sets forth how you will pay your creditors. Your secured debts, those that have assets pledged as collateral for the lender, are often paid first. Unsecured debts are among the last to be paid under a Chapter 13 plan, and it is common for an unsecured creditor to receive only pennies on the dollar owed, if anything.
Lien stripping can help a homeowner that has more than one mortgage and who has a home that is worth less than what is owed under the first mortgage loan. In other words, the value of the home is insufficient to support the first mortgage loan, which means there is no remaining value to support the second mortgage loan. This, in essence, makes the inferior loan unsecured debt.
For example, if you bought your home for $175,000, and three years later took out a second mortgage loan for $50,000. At the time of your bankruptcy filing, you owe $165,000 on the first loan and $45,000 on the second loan. The value of your home is now only $145,000. Thus, the home is “underwater” and the lien stripping process could apply to the second mortgage.
It is important to note that there are restrictions on when lien stripping may be applied to the first mortgage loan on a principle residence. In certain situations, the law requires that the first mortgage loan be wholly secured, regardless of the value of the home. In these situations, you are unable to discharge the amount of the loan that exceeds the value of the home.
Lien stripping can be confusing, so let us answer your questions. We can help you understand if you qualify to file a Chapter 13 bankruptcy and if the lien stripping process could benefit you.
If you are considering filing for bankruptcy protection, let us help. We understand how important your bankruptcy case is to you, and we will handle it with the discretion and dedication that have become our calling cards. Contact the Milwaukee bankruptcy attorneys of the DeLadurantey Law Office, LLC today by calling 414-377-0518. Like us on Facebook.