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Lien Stripping

Lien Stripping.

Lien stripping refers to the rights enjoyed by debtors in bankruptcy to use Bankruptcy Code Section 522(f) to strip off judicial liens, in whole or part, from real or personal property.  Additionally, liens can be stripped from non possessory, non purchase money security interests in household goods, professional books and health aids.  The concept is that debtors may claim protections or exemptions in certain property deemed reasonable and necessary for everyday life and business.  To the extent certain liens impair those exemptions, the law allows the liens to be stripped off the property.  This is accomplished by a bankruptcy court motion to avoid the lien.

For example, suppose a house is worth $500,000, there is a $460,000 first mortgage balance on the property and a subsequent judgment lien recorded with $50,000 due.  If a bankruptcy is later filed where a debtor claims a $100,000 homestead exemption in this house, then upon a proper motion, a court could order the lien stripped, since the mortgage balance ($460,000), plus the homestead exemption ($100,000) equals $560,000, exceeding the house value ($500,000) by $60,000, so that there is no equity for the judgment lien to attach, so the court would order the lien stripped in its entirety. With help from a bankruptcy lawyer in Los Angeles, it is possible to have liens stripped from your debts so long as there is no equity for the lien to be attached.

If we change the facts so that the home is worth $600,000, we get a different result, because the mortgage balance ($460,000), plus the homestead exemption ($100,000) equals $560,000, and given the value of the home ($600,000), there would be $40,000 of equity to which the $50,000 judgment lien could attach.  In this case, the judge would rule that $40,000 of the judgment lien endures as a lien against the property, and that the remaining $10,000 of it is stripped off the property.

Mortgage Lien Stripping.

In Chapter 11 and Chapter 13 reorganizations, mortgage liens can be fully or partially stripped off as liens against real property.  Unlike the lien strip motions discussed above which deal with nonconsensual judgment liens, here we are dealing with consensual liens such as mortgages and equity lines.  The issuance of a discharge or successful completion of the plan is usually required before a court will order a mortgage stripped.  If the home is a personal residence of the debtor, the mortgage must be completely unsupported by equity in order for the mortgage to be stripped.  This means that only junior mortgages are eligible to be stripped.  For example, if a debtor’s first mortgage on his home has a balance of $600,000, and his home is worth $500,000, then any and all junior mortgages are eligible to be stripped off and treated as unsecured debt in a Chapter 11 or Chapter 13 reorganization. An experienced stop foreclosure attorney in Los Angeles can help you keep your principal real estate properties from being sold while stripping away mortgage liens. You can have your mortgage liens stripped and your property protected with a Chapter 11 or 13 bankruptcy lawyer in Orange County on your side.

The rules are different, however, for non-principal residence real estate, where a mortgage loan can be partially stripped off title.  If a Chapter 11 or Chapter 13 debtor owns a rental property, for instance, with a 1st mortgage balance of $600,000 and a 2nd mortgage balance of $200,000, and the property is worth $650,000, then the court will order that the portion of the 2nd mortgage which is supported by equity ($50,000) remains as a lien on the rental real estate, and the part that is unsupported by equity (the remaining $150,000) is stripped off as a lien against the real estate.  Once this issue is resolved, however, there is an additional problem which the debtor must resolve.  The $50,000 remaining secured debt of the junior mortgage must be dealt with in the reorganization plan.  This means the debtor must propose acceptable terms to completely pay off the $50,000 within the life of the plan.  This can be especially problematic in a Chapter 13 case, where the maximum plan term is only 5 years, and debtors often have limited income.  It is less problematic in a case with a Chapter 11 bankruptcy attorney, where debtors can propose a plan term of 10, 15, 20 years, or even longer. Find a solution to your financial issues with a debt settlement lawyer in Los Angeles today.

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mike@cheklaw.com

Lien Stripping was last modified: May 12th, 2016 by Chekian Law Office

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