Filing for bankruptcy has the potential to eliminate many kinds of debts. However, debts secured by a lien are not always included. Chapter 13 bankruptcy can be used to eliminate or reduce different types of liens.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is a reorganization bankruptcy. The goal is to take the individual’s debts and restructure them into something more fair and manageable given their income and assets. Naturally, this includes a way to deal with liens.
Under Chapter 13, some liens can be reduced to the value of the collateral to which it attaches. This ensures that worthless liens do not get included in the reorganization plan.
To determine whether a lien can be stripped or crammed down, it is necessary to establish the value of the collateral and order in which the liens were placed. The first liens to be placed are the first to be paid. In the case of a home loan, the value of the collateral matters because you can only strip or cram down “wholly unsecured” liens, aka liens that are not supported by any portion of the value of the property.
Here’s an example of how lien stripping works:
Let’s say you owe $100,000 on a mortgage on a home now worth $90,000, plus an additional $10,000 from a home equity line of credit. There is no collateral securing that additional $10,000 lien because the entire worth of your home is bound up in that first mortgage. This is a perfect example of a lien that could be stripped with Chapter 13.
Lien stripping is a confusing topic. Fortunately, King & King bankruptcy attorneys can help. Calling us at 404-524-6400 for a free consultation is simply the easiest way to make sure you arrive at a correct understanding of the options available to you in your bankruptcy.