Lien Stripping Through Chapter 13 Bankruptcy
If you have more than one home loan you are struggling to repay along with your original mortgage, Chapter 13 bankruptcy might provide a way to discharge those extra loans almost entirely and hold onto your home. Here’s how lien stripping works.
When you take out a home loan, you put your property up as collateral in case you can’t repay the loan. When your home increases in value, your equity also increases, giving you more collateral to borrow against. Many homeowners who borrowed against their home when its value was high found they owed more than their home was worth when its value precipitously dropped. That’s the bad news. The good news is, you can get out from under much of that debt through Chapter 13 bankruptcy.
For lien stripping to work, the value of your property must have fallen below the total balance of your collateralized loans. When that happens, some of that formerly secured debt is now unsecured. The liens those loans had on your house are stripped, and the bankruptcy court treats that loan debt the same way it treats credit card debt.
For example, let’s say your home was worth $250,000 when you bought it, but declined in value to $175,000. You owe $215,000 on the first mortgage, you have a second mortgage worth $50,000 and a third worth $10,000. You owe $275,000, but only $175,000 is secured. Your second and third mortgages are stripped.
When you file for Chapter 13 bankruptcy, the stripped lien debt is treated as a low-priority, unsecured debt. You pay a certain amount of that debt every month as part of your court-approved payment plan. But you only pay for the life of the plan, not until you satisfy the debt. After you complete your plan in three to five years, you will probably still have tens of thousands of dollars in debt left, but the bankruptcy court will discharge that debt, so you won’t have to repay it.
If you’re considering personal bankruptcy, getting personalized legal advice can save you time, heartache and money. Call Miller Law Group, P.C. today at 434-202-5293 or contact us online to make an appointment for a FREE consultation.