Wouldn’t it be nice if you could remove your second mortgage and pay it off as an unsecured debt for pennies on the dollar?
With home prices at record lows and foreclosures at record highs, many homeowners are facing the fact that their home is worth substantially less than what is owed on the mortgage. Many of these homeowners that feel trapped in a home that is “upside down,” are making the difficult decision to walk away from their properties.
There are two areas where homeowners can use a Chapter 13 bankruptcy filing to remain in their homes – one, when they are behind on payments and need time to get caught up, and two, to remove a second mortgage or home equity line of credit from their home.
Lien Stripping in Chapter 13
“Lien stripping” refers to the process of reducing a secured claim to the value of the underlying collateral. It uses the combined effect of 11 U.S.C.A. § 506(a) and 11 U.S.C.A. § 506(d) to bifurcate the lien into secured and unsecured. The secured lien is allowed in the amount up to the fair market value of the property at the time of the stripping. The balance of the lien, which exceeds the fair market value of the property, is now deemed unsecured.
Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the assets. Section 506(a) and 506(d) of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the lien is now unsecured.
The most common application of lien stripping is the reduction of car loan liens to the present value of the vehicle however it is currently used more often with home mortgages in bankruptcy situations. Lien stripping with car loans has been limited to vehicles purchased over 910 days.