Filing for Chapter 13 bankruptcy may be able to help underwater homeowners through a process called lien stripping. What is lien-stripping? When a homeowner files for a Chapter 13 bankruptcy in hopes of consolidating their debt while keeping their home, lien stripping can eliminate some of the debt the homeowner owes on the home.

Many homeowners have more than one mortgage or lien on their property. In some cases, given the fluctuating values of real estate, homeowners can owe more than their home is worth. This is especially the case when a borrower takes out more than one mortgage or lien on their home during times of falling property values. Owing more than a home is worth is a contributing factor to many Chapter 13 bankruptcy filings.

Lien stripping is the process of eliminating unsecured junior liens through a Chapter 13 bankruptcy. A junior lien is a mortgage that is in second, third or fourth position to the primary mortgage on a home. Essentially, lien stripping allows for a homeowner who owes more than their property is worth to eliminate all unsecured liens on their home by converting the liens to unsecured debt.

What Is Lien Stripping: An Example

The following example helps to illustrate how lien stripping works: Assume a home is worth $300,000. There are three mortgages on the home, the first mortgage for $200,000, a second mortgage for $100,000, and third mortgage for $50,000. The first and second mortgages are fully secured by the value of the home. However, the third mortgage is unsecured because when the homeowner sells the property, all the proceeds from the sale will go to the first-and second-mortgage holders. Nothing will be left for the third mortgage-holder.

In this case, a court overseeing a Chapter 13 bankruptcy may strip the third mortgage, leaving the homeowner responsible for the first two mortgages. Importantly, if a mortgage is partially secured by the home, that mortgage cannot be stripped. When the court strips a lien, the debt is not automatically erased. Instead, the court converts the lien to unsecured debt. If the filer completes their Chapter 13 bankruptcy repayment plan, then any remaining amount of unsecured debt will be discharged. Of course, if the payments are not made, the court will not strip the mortgage and the homeowner will remain responsible for it.

Lien Stripping and Paying Debt in Athens, Georgia

That last point is important. Don’t make the mistake of assuming you won’t have to pay any of the debt associated with a junior lien when you file for Chapter 13 bankruptcy. Lien stripping converts an unsecured lien into unsecured debt, but it may not eliminate it entirely. Through your Chapter 13 repayment plan, you may still have to pay some of the debt, although the amount that you will have to pay will typically be less.

It’s also worth noting that lien stripping doesn’t apply strictly to traditional mortgages. It can also apply to lines of credit that essentially serve the same purpose as a mortgage.

When Lien Stripping Isn’t Available

It’s important to be aware that lien stripping is not always an option when filing for bankruptcy. If you’re filing for Chapter 7 bankruptcy, lien stripping is off the table. The only types of liens that may potentially be stripped in Chapter 7 bankruptcy are judicial liens. These are liens that result from lawsuits.

The type of bankruptcy you should file for depends on a number of factors. To better understand which type of bankruptcy is best for you, strongly consider discussing your case with a qualified Georgia bankruptcy attorney.

Sometimes, filing for Chapter 7 bankruptcy can help a homeowner keep their home because it improves their ability to make mortgage payments. However, if you have a certain amount of equity in your home when you file for Chapter 7 bankruptcy, your bankruptcy trustee may decide to sell your home in order to pay off your creditors. Because knowing how a bankruptcy trustee will address these matters when you file can be difficult, it’s extremely helpful to review your options with the assistance of a professional who understands bankruptcy law.

When Lien Stripping Is Available in Georgia and Athens

Lien stripping is also only an option if the value of the senior lien is greater than that of the home’s fair market value. To return to the example above, the third mortgage for $50,000 is unsecured because the first two mortgages fully secure the value of a home. On the other hand, if the value of the home was $325,000 instead of $300,000, the house would partially secure the third mortgage. 

That said, it’s not always entirely clear what the value of a home actually is. Sometimes, holders of junior liens attempt to argue that they should be secured because a homeowner’s appraisal of their house’s value is inaccurate.

This highlights one of the many reasons it’s extremely important to hire an attorney when preparing to file for Chapter 13 bankruptcy. If the holder of a junior lien disagrees with your appraisal of a home’s value, it can be very helpful to have a lawyer on your side. Just because a third mortgage holder disagrees with you doesn’t mean they are necessarily correct.

If a third mortgage holder does claim your appraisal is inaccurate, the court may hold an evidentiary hearing. Your home’s appraiser will usually be required to testify. Again, while no one can guarantee a particular outcome of an evidentiary hearing, in general, the odds of the outcome being ideal for you will be much greater if you have professional legal assistance.

Reasons for Second Mortgages or Liens in Georgia

Lien stripping only tends to affect mortgages you have taken out after your initial mortgage. Getting a second or third mortgage involves converting the equity you currently have in your home into a loan.

There are various reasons homeowners sometimes decide to take out second mortgages. Sometimes they do so to acquire funds to quickly pay off other debts, add to the value of their homes by funding renovations, or otherwise make purchases they couldn’t afford. However, you must be aware that just because you believe you have a reason to take out a second mortgage, that does not mean it’s a good reason. Be very careful when deciding if another mortgage is necessary.

Lien Stripping: The Difference Between ‘Strip Downs’ and ‘Strip Offs’

If you’re asking, what is lien-stripping, it’s important to know that it comes in two forms: strips downs and strips offs.

A strip off applies to the entire lien. When a lien is stripped off, it is entirely unsecured, and can thus be converted entirely to unsecured debt.

A strip down involves only partially converting the lien. As in the above example, if the house partially secures a third mortgage, then a lien would be stripped down, but not stripped off.

Lien Stripping: Essentials of the Process

The process of lien stripping may depend somewhat on the specific details of a given case. Generally, though, stripping a lien involves the following key steps:

Filing for Chapter 13 Bankruptcy

Once more, no basic overview on a website can tell you whether you should file for a particular type of bankruptcy. You must discuss this topic with experts to determine the ideal course of action.

That said, it’s common for people to file for Chapter 13 bankruptcy when they earn a regular income in some capacity. This is because Chapter 13 bankruptcy involves paying off debts over time instead of completely eliminating them. Usually, a person who qualifies for Chapter 13 bankruptcy will pay off their debts over the course of three to five years. A court will determine how much time a person has to pay off their debts by comparing their income to the state median.

Along with allowing for lien stripping, filing for Chapter 13 bankruptcy offers various advantages worth being aware of. Often, homeowners decide to file for Chapter 13 bankruptcy instead of another form of bankruptcy because it allows them to keep their homes and cure delinquent mortgage payments.

You can begin filing for Chapter 13 bankruptcy by filing a petition with your local bankruptcy court. However, you should be aware that not everyone qualifies for Chapter 13 bankruptcy. You need to prove you meet certain criteria when filing. This will be easier to do if you hire an attorney. Additionally, upon reviewing your case, an attorney can determine whether you qualify for Chapter 13 bankruptcy, or whether you’d be wasting your time filing for it because you don’t meet the established criteria. Along with taking up your time, filing for Chapter 13 bankruptcy could cost you hundreds of dollars in filing fees.

Be aware that you also need to file a repayment plan by a certain deadline after you file for Chapter 13 bankruptcy. Failure to meet the deadline can prevent you from qualifying, putting your home at risk.

That isn’t meant to worry you. On the contrary, it’s meant to encourage you to coordinate with an attorney as soon as you begin preparing to file for Chapter 13 bankruptcy. An attorney will help you avoid missing critical deadlines. They can even prepare and submit the necessary paperwork for you, unburdening you of certain responsibilities during what is likely an already stressful time in your life.

What Is Lien-Stripping in the Process of Filing a Motion?

After you’ve filed for Chapter 13 bankruptcy, your attorney can proceed to file a motion to strip the lien by having the debt reclassified. This will begin the lien stripping process.  The court will review the circumstances and determine if a lien qualifies for lien stripping.

Appraisal

It’s not uncommon for courts to require independent appraisals of homes before determining if a lien may be stripped. This is yet another reason to hire a qualified bankruptcy lawyer. If necessary, your attorney may be able to help you find an appraiser who the court approves of.

Determination

When you file for Chapter 13 bankruptcy, certain creditors are placed in a pool of creditors to whom you must pay back some of your debts. Chapter 13 bankruptcy often simplifies the process of repaying debt by reducing what you owe and essentially gathering your creditors together into a single entity.

Once a home has been appraised, if the court determines a lien may be stripped, the relevant creditor will be placed in the pool of other qualifying creditors. Just remember, they may disagree with the court’s determination, taking legal action in an attempt to prevent a lien from being stripped.

Payment

If a creditor is unable to prevent a lien from being stripped, you will make affordable monthly payments to pay off your debt. A lien will not technically be stripped until you have made all payments. If you miss a payment, you will not be able to strip off a lien.

Lien Stripping and Non-Primary Residences

Most homeowners filing for Chapter 13 bankruptcy opt for lien stripping as a means of protecting their primary residences. However, you may also own rental properties or vacation properties that you also wish to protect. Can lien stripping help in these circumstances too?

Potentially. In many cases, the answer is yes, but various factors influence whether lien stripping may apply to certain properties. Your attorney can review the details and determine if lien stripping is a way to protect a property that you rent out or use as a vacation home from being repossessed. 

Explore Your Lien-Stripping Options with an Athens Bankruptcy Lawyer in Georgia

If you are considering filing for bankruptcy, but wonder whether you will be able to keep your home, you may be asking, What is lien-stripping? Contact the knowledgeable attorneys at the Georgia bankruptcy law firm, Morgan & Morgan, P.C. To learn more, call 706-510-3920 to schedule a free consultation today.

 

Originally published on May 19, 202o and updated on September14, 2021.