Lien stripping is a process that can occur in a Chapter 13 bankruptcy. It applies when the following is true.
- The mortgage on your home is greater than the value of the home.
- You have a second or even a third mortgage on the home.
Second mortgages are secured debts. Normally, a second mortgage holder may foreclose on your home just as a first mortgage may. Yet a second mortgage is known as a “junior lien.” The oldest, first mortgage takes precedence.
Lien stripping converts these debts into unsecured debts. These non-priority debts will be treated exactly like other unsecured debts. They’ll be rolled into your payment plan. Any balance not paid off during the completion of the plan will be discharged at the end.
The second or third mortgage would be discharged after you finish paying off your bankruptcy plan. You can continue paying your first mortgage to remain in your home.
Lien stripping was established in the 2011 case, Fisette vs. Keller. The courts ruled that if the mortgage is already upside down, the lien is essentially unsecured anyway. Creditors retain the right to be treated exactly like any other unsecured creditor in Chapter 13.
If you have a third mortgage, the home’s value must be less than that of the second and first mortgages combined. Essentially, nothing must be left to secure the liens stripped from the mortgage.
Lien stripping does not apply to contractor liens or tax liens, only second or third mortgages. It is also different from a mortgage cram-down, in which the courts take a predatory, upside-down loan and reduce it to the actual value of a property not serving as a primary homestead.
Nevertheless, you may use Chapter 13 to pay off those creditors and thus eliminate those liens. These liens are known as “involuntary” liens. A bankruptcy lawyer can file a Motion to Avoid a Judicial Lien to remove the lien from your house after you’ve completed bankruptcy. It does not happen automatically, so make sure you ask your lawyer about it.
Lien stripping is a complex legal matter. If you have liens on your home and are looking for a fresh start or are in danger of foreclosure due to an inability to pay any lien, it may be time to contact a New Jersey bankruptcy attorney.
Contact Labayen Law to schedule a free consultation. A fresh financial start may only be a phone call away.