Dealing with bankruptcy is a complicated process, and trying to navigate your options can be an even more arduous task. Our experienced bankruptcy attorneys are knowledgeable of California bankruptcy laws and can make sure you choose the best option for your specific case. When it comes to Chapter 13 bankruptcy, lien stripping is an effective form of relief if you have several unpaid mortgages. In this article, we will discuss what lien stripping is and how it works under Chapter 13 bankruptcy.
What Is Lien Stripping?
If you took out a loan to buy a property, you agreed to put your house up as collateral. This agreement gives the lender a right to the property if you cannot pay the mortgage as initially set in the terms. This right is known as a lien.
Lien stripping is the process of canceling liens, alleviating some of your debts. Specifically, it allows you to cancel junior liens, such as second and third mortgages, from your property. In California, you can use lien stripping for your principal property as well as income properties (e.g., an apartment building). This procedure is only available under Chapter 13 bankruptcy and has a few rules that determine your eligibility to use lien stripping. We will explain this more in the next section.
How It Works
When your house gets foreclosed, the first mortgage lender receives priority in payment. However, you still owe money to any second or third mortgage lenders. Because these debts can be overwhelming, when you file for bankruptcy under Chapter 13, you may be able to “strip” your debts to these second or third mortgage lenders.
If you need to be eligible for lien stripping, no part of a junior mortgage can be secured by the property. For example, you may owe more to your first lender than the property is worth at fair market value. If this is the case, all the money goes to the original lender. There is nothing left from the sale for the second lender, making this junior mortgage unsecured.
Without any security from the property, the court may recognize the mortgage as an unsecured debt under Chapter 13 bankruptcy. Once the mortgage is “stripped,” it receives the same treatment as other unsecured debts. Usually, the unsecured debts become a part of your three to a five-year repayment plan. The court determines a set sum that you must pay in monthly installments to the trustee. The trustee then distributes the amount to creditors. Although a portion goes to unsecured creditors, they may receive little to nothing because these debts are considered less critical.
Talk to an Experienced Bankruptcy Attorney
If you are dealing with foreclosure and considering bankruptcy, talk to an experienced attorney about your choices. We may be able to help you find other alternatives to bankruptcy. If not, we will walk you through the bankruptcy process and help you choose the best path for your situation. We have three offices in the Los Angeles area. We are here to serve you, whether you are looking for a:
- A bankruptcy attorney in Chatsworth, CA
- A bankruptcy attorney in Santa Barbara, CA
- Or a bankruptcy attorney in Ventura, CA