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Lien Stripping during a Chapter 13 Bankruptcy

A chapter 13 sign

If you’re a homeowner and your expenses are starting to become more than you can handle, you may be most concerned about what you can do to prevent losing your home through a foreclosure. Filing for bankruptcy under Chapter 13 can offer multiple benefits to homeowners that could allow them to keep their home when filing for bankruptcy. A Chapter 13 bankruptcy can be especially beneficial if you have a second mortgage, due to a process known as lien stripping. Read on to learn how lien stripping could benefit you, and contact an experienced Southern California bankruptcy attorney for more information.

Lien Stripping, explained

Lien stripping might be a term you’ve heard before but not fully understood. It refers to the process of stripping a lien from the title of your home. When filing for bankruptcy under Chapter 13, if your home is worth less than the outstanding balance of your primary mortgage, you may be eligible to have any junior liens, such as second mortgages, stripped from the title of your home. Under these circumstances, the first mortgage is encumbering all of the equity in your home. With an attorney’s help, you can petition the court to have that second mortgage stripped, which makes the lien into an unsecured debt akin to a credit card or medical debt.

If this seems confusing, let’s look at an example. Say you bought your home when the housing market was still robust, and owe $500,000 on your first mortgage. The home is now worth $425,000. You took out a second mortgage to help you cover your expenses and are now struggling to make the payments you owe toward that $35,000 debt. By filing for bankruptcy under Chapter 13, you could have that second mortgage stripped, with the debt being added to the pool of unsecured debts you would pay back through your court-approved payment plan. You’d pay what you could afford during the repayment period, and if any amount remained on that second mortgage after the conclusion of the repayment period, it would be discharged.

Lien stripping not available under Chapter 7

Keep in mind that lien stripping isn’t available when filing for bankruptcy under Chapter 7. With a Chapter 7 bankruptcy, you’d still receive a homestead exemption that could allow you to file even though you own property, and the automatic stay put in place when you file for bankruptcy could provide the time you need to save money and become current on your mortgage. However, you would not be able to strip off any junior liens on your home when filing for bankruptcy under Chapter 7, and you would need to continue making payments on any liens on your home to stave off foreclosure.

If you’re in Southern California and are struggling to stay current with your bills and payments, find out if you might be a good candidate to file for bankruptcy by contacting the knowledgeable and compassionate Ventura bankruptcy attorneys at Rounds & Sutter for a consultation, at 805-650-7100.