Southern California Bankruptcy and Debt Relief Attorneys Serving Ventura, Santa Barbara, and Westlake Village
Many people have liens on their homes and other property. When they fall behind on their debt obligations, they risk foreclosure or repossession. With the difficulties caused by the novel coronavirus pandemic, many debtors are in worse financial condition than ever. Home prices have increased significantly, but many home buyers may find themselves locked into a mortgage that far exceeds the market value of the house. There is, however, a silver lining: When a debtor’s home value plummets, they may be able to remove certain mortgages using a process known as lien stripping.
If you are experiencing financial hardship, the California debt relief and bankruptcy lawyers at Rounds & Sutter are ready to help. We will review your financial situation and help you explore your best options to protect your home and your finances during these troubled times. We are here to put you back on the road to financial recovery and freedom.
What is Lien Stripping?
A lien is a form of security interest granted over an item of property, typically used as collateral to satisfy a debt or other obligation. A home mortgage is a lien against the house. The lien gives the creditor the right to use the collateral to repay the debt should the debtor default; in the case of a home mortgage, lenders may be able to foreclose on the home and use the sale proceeds to repay the mortgage.
Lien stripping refers to the process of removing a lien. Many homeowners have multiple liens (a first and a second mortgage, for example). The priority of those liens is based on when the liens were recorded–the first mortgage has the senior lien, second and later mortgages are known as “junior liens.” Under certain circumstances, a debtor may be able to “strip” the junior lien, which downgrades the lien to “unsecured” status. Unsecured debts are subject to inclusion and/or discharge in bankruptcy.
How Does Mortgage Lien Stripping Work?
In California, debtors who file for bankruptcy under Chapter 13 can “strip” junior liens from a home when the value of the home is less than the outstanding amount of the senior loan. For example, let’s assume a debtor has an outstanding first mortgage of $500,000, and a second mortgage worth $50,000, but the value of the home has dropped to $450,000. In finance parlance, the debtor is “upside-down” on the house, or the home mortgage is “underwater.” In this instance, the first mortgage is underwater, not to mention the second mortgage.
Under normal circumstances, Chapter 13 bankruptcy applies only to unsecured debts (debts with no collateral, such as credit card debts). Home mortgages are secured by the home and are thus not included. If a debtor has multiple mortgages, however, and the fair market value of the home is worth less than the senior mortgage, then the debtor can use Chapter 13 to strip the junior mortgages. In the example we gave above, the debtor can file for Chapter 13 bankruptcy and have the $50,000 second mortgage stripped from the property. The $50,000 loan will now become an unsecured loan, much like a personal loan or a credit card bill. That loan is now subject to inclusion in the Chapter 13 bankruptcy; the debtor can reduce their monthly obligation and may even be able to discharge a solid portion of the loan at the end of the Chapter 13 repayment period.
The process can work the same with more than two mortgages. If the debtor described above had a third mortgage for $25,000, both the second and third mortgages could be stripped. If the value of the home was instead $510,000, then both the first and second mortgages ($500,000 + $50,000) would be covered and not subject to lien stripping, but the third mortgage ($25,000) could be stripped. If the home were worth $560,000, then the third mortgage would be “partially secured” and not subject to stripping. The borrower, however, might be able to challenge the appraisal and if the newly-obtained appraisal reduces the home’s fair market value, then the lien could be stripped.
Talk to a knowledgeable and experienced California debt relief attorney about your home and your mortgages to find out if you are eligible for lien stripping.
Protect Your Finances, Your Family, and Your Home. Rounds & Sutter is Ready to Help.
If you are struggling with debt, including student loans, credit card debt, and a past-due mortgage, you have options. You could possibly prevent foreclosure or repossession through lien stripping, and you might be able to entirely relieve your debt through bankruptcy and other legal measures. If you are behind in your house payments or in default, or if you are facing mounting pressure from various financial obligations, contact Rounds & Sutter for a free consultation. We will take the time to listen to your situation and help you decide the best course of action to protect your finances, your family, and your future.