Monday, August 15, 2011

Lien Stripping in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, liens such as mortgages, security interests and even voluntary liens can be stripped or reduced to the actual fair market value of the collateral.  This is often called lien stripping, lien avoidance, and cram downs.

Home Mortgage Liens

In today's economy many people have multiple mortgages on their property.  Those mortgages were lended when property values were high.  The downturn in the economy has caused home prices to plummet leaving some home owners owing substantially more on their home than it is worth. 

A home mortgage lien can be stripped in Chapter 13.  The second or third mortgage must be wholly unsecured.  Which means the home must be worth less than what is owed on the first mortgage.  To obtain the most accurate value of your home we recommend getting a Comparative Market Analysis (CMA).  Any realtor will be able to complete this and it should be done free of charge.  They will look at comparable homes in your area and base the value on recent sales. 

To successfully strip the lien a Chapter 13 must be filed.  The attorney will then file a Motion to Avoid the Lien of the mortgage company.  Once the court enters the order avoiding the lien the Debtor needs to record the order at their local recorders office.  The Chapter 13 must also be successfully completed.  If the case is dismissed without a discharge the lien will re-attach to the property.

Vehicle Liens

The most common form of lien stripping involves personal vehicles.  For instance, if the vehicle is worth $6,000 and the consumer owes $8,000 to the secured creditor the consumer can pay $6,000 plus interest in a Chapter 13.  Two thousand dollars is then stripped off the collateral (car).  This is commonly referred to as "cramming down" the loan.  The Chapter 13 plan must provide for the secured portion of the debt to be paid in full over the life of the plan.  The interest paid is generally lowered as well to approximately 4.25%.  The $2,000 that is now unsecured can be paid less than 10% along with other unsecured claims.

According to §506 of the bankruptcy code, vehicles purchased within 910 days of filing are not eligible to be crammed down.  This rule, unfortunately, eliminates many consumers.  However, if the vehicle was purchases more than 910 days (2.5 years) ago the vehicle will be eligible for lien stripping in a Chapter 13.  It may also be advantageous for some consumers to wait until the 910 have passed to file bankruptcy if they are significantly upside down on a vehicle they wish to keep.      

If you have questions regarding bankruptcy in Indiana please contact Jackson & Oglesby Law at (877) 489-0908 or visit us at Jackson & Oglesby Law can assist you with all aspects of your bankruptcy case. If you have questions regarding Chapter 7 bankruptcy, Chapter 13 bankruptcy, stopping foreclosure or wage garnishment, avoiding liens, stopping law suits, ending creditor harassment, discharging debt, etc. we can help! Please call us today for your free consultation to determine which bankruptcy may be right for you.


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