If you are like most homeowners, you purchased your house with a mortgage, which is a lien on the property that the lender can use to enforce payment of the loan. This first mortgage takes priority over any subsequent liens, such as those used to secure home equity loans or lines of credit. However, if you later file for Chapter 13 bankruptcy protection, all secured loans are required to be paid back. That’s when a remedy known as “lien stripping” can offer a significant advantage.
Lien stripping is the process by which you can eliminate junior liens and in so doing make it easier to keep your house rather than sell it during bankruptcy. When a lien is stripped by court order, the underlying loan is converted to unsecured debt. That means it will be included in your Chapter 13 plan, which requires you to pay off a portion of your unsecured debts over three to five years. Upon the successful completion of the plan, any remaining unsecured debt is wiped out.
To qualify for lien stripping, you must owe more on your first mortgage than your house is currently worth, such that a foreclosure sale wouldn’t raise enough money to pay back the first mortgage lender. Because the junior lien holders wouldn’t get any money from foreclosure, their loans are essentially without collateral. By stripping the liens, the court allows you to use Chapter 13’s protections to retain your home.
One key thing to remember is that the junior mortgage liens will not officially be removed from your house until you complete your Chapter 13 repayment plan and you receive a discharge from the court. If your case for some reason gets dismissed before you finish the plan, those liens remain in force.
The North Texas bankruptcy lawyers at Hayes, Berry, White & Vanzant, LLP have deep experience helping clients develop workable Chapter 13 debt reorganization plans. If you are in financial trouble and would like to discuss your options, please call 940-230-2386 or contact us online. For your convenience, we have offices in Denton, Flower Mound, Gainesville and Celina.
