A lien is a type of security interest granted over property. Often, liens are used as collateral to satisfy a debt. For example, a home mortgage is a lien against the house. Debtors may find themselves locked into a mortgage that exceeds the value of their house. In some situations, it may be possible to remove certain mortgages through lien stripping. Lien stripping may help prevent foreclosure or repossession of a home. If you are considering declaring bankruptcy and want to get rid of liens on your property, we can assist. At the Bankruptcy Center of Illinois, our DuPage County lien stripping lawyers are ready to help you understand your options and pursue the best course of action.
A lien provides the creditor the right to use collateral to repay debt if the debtor defaults. Lien stripping is the process of removing a lien. Often, homeowners have more than one lien. They may have a first and second mortgage, for instance. The priority of the liens is set by the date they were recorded. The senior lien applies to the first mortgage, and second and later mortgages are “junior liens.”If a debtor can strip the junior lien, that lien becomes unsecured. An unsecured debt may be discharged during bankruptcy proceedings.
It is common for a second mortgage to be stripped. If a debtor owes more money on their first mortgage than the house is worth, that first mortgage is “underwater.” If they also have a second mortgage, this may be unsecured by any value in the house. This would make it eligible to be stripped.The debtor would still be responsible for the other mortgage. In some situations, a mortgage is partially secured by the house, and that mortgage cannot be stripped.
An example appropriate for lien stripping during bankruptcy includes a junior lien that is not completely secured because the equity in the home does not cover a segment of the amount of the lien. A home worth $300,00 may have a first mortgage of $350,000 and a second mortgage of $25,000. The first mortgage secures the property. The second mortgage is unsecured. In this case, the junior lien would be treated similar to debt such as medical bills or credit cards. During bankruptcy proceedings, if a payment is made on the debt repayment plan under Chapter 13 bankruptcy, the second mortgage can be stripped and the debtor would not owe anything on that mortgage.
Other junior liens that may be stripped in a Chapter 13 bankruptcy include home equity loans, judgment liens, home equity line of credit, and second or third mortgages.
In most cases, lien stripping is appropriate in a Chapter 13 bankruptcy. During Chapter 13 bankruptcy proceedings, the debtor must repay certain debt through a repayment plan. While making payments, the debtor receives an automatic stay from creditors seeking to collect.
Upon completion of a Chapter 13 bankruptcy plan, the debtor will have discharged their unsecured debts. Lien stripping converts secured debt into unsecured debt. For this reason, Chapter 13 bankruptcy provides a way to get rid of these debts. If the Chapter 13 repayment plan is not completed, the junior mortgage would not be stripped, and the debtor would be responsible for repayment.
When the bankruptcy court is asked to “strip” a lien, they may be asked to convert a junior mortgage that is not fully secured into unsecured debt. If the converted mortgage is removed from the property, it will be treated like other non-priority debt not secured by collateral. This may include credit card debt, or medical debt. Part of this unsecured debt will be paid through a Chapter 13 plan, but usually it is a small amount.
Struggling with debt can be overwhelming, but you do have options. Here at the Bankruptcy Center of Illinois, our lien stripping attorneys help you navigate the best course of action that protects your financial future. We provide a free consultation for clients throughout DuPage and nearby communities and can be reached directly by calling (773) 993-0024 or online.