Posted on: 22nd Dec, 2009 01:51 am
Most of us are facing severe financial crisis due to the ongoing recession. As a result, the property values have dipped and a large number of borrowers are forced to file personal bankruptcy. Quite a large number of homeowners are filing Chapter 13 in order to reorganize their debts so that they are in a better position to pay off their mortgage. However, most of us do not know the concept of lien stripping associated with Chapter 13. Let's take a look as to what it is all about:
Lien Stripping…
If a bankruptcy court removes your second mortgage, it is known as "stripping" of the lien. This can happen when the collateral does not have enough equity after deducting the primary lien from the property's current market value. Lien stripping can take place both in case of Chapter 13 and Chapter 11 bankruptcy filings.
Let's take an example…
Suppose a borrower has a property worth $150,000. The borrower has two mortgages on it – the first mortgage worth $150,000 and the second mortgage worth 110,000. As we know, the lenders will be secured up to the value of the collateral. Keeping this in mind, the first lender is secured by the value of the collateral whereas the second lender has nothing to secure their loan. Thus, the second mortgage will be considered as unsecured as the collateral has no value left over after satisfying the dues of the first mortgage/lien. The court will treat the second lien as unsecured and it will get stripped off.
Thus, after your bankruptcy is discharged, the second lender will not be able to collect the mortgage dues from you. Also, the homeowner will not have to pay the lien when he/she sells off the house.
Lien Stripping…
If a bankruptcy court removes your second mortgage, it is known as "stripping" of the lien. This can happen when the collateral does not have enough equity after deducting the primary lien from the property's current market value. Lien stripping can take place both in case of Chapter 13 and Chapter 11 bankruptcy filings.
Let's take an example…
Suppose a borrower has a property worth $150,000. The borrower has two mortgages on it – the first mortgage worth $150,000 and the second mortgage worth 110,000. As we know, the lenders will be secured up to the value of the collateral. Keeping this in mind, the first lender is secured by the value of the collateral whereas the second lender has nothing to secure their loan. Thus, the second mortgage will be considered as unsecured as the collateral has no value left over after satisfying the dues of the first mortgage/lien. The court will treat the second lien as unsecured and it will get stripped off.
Thus, after your bankruptcy is discharged, the second lender will not be able to collect the mortgage dues from you. Also, the homeowner will not have to pay the lien when he/she sells off the house.
Hi Sara,
The lien stripping is indeed quite effective in cases where the property value has gone down to a great extent. The second mortgage lien will be stripped off the property, if the proceed from the sale of the home is not enough to cover the second mortgage even in part. However, say, if the value of the house is $150k and the first mortgage is worth $149k, the second mortgage can be paid off in part. In this situation, the second lien cannot be removed from the property.
One should also keep in mind that lien stripping is associated with bankruptcy Chapter 13. In case of Chapter 7, the second mortgage lien remains on your property even after you are discharged from the bankruptcy. The lender cannot come after you after discharge from Chapter 7, but he can foreclose on the property to satisfy the lien.
The lien stripping is indeed quite effective in cases where the property value has gone down to a great extent. The second mortgage lien will be stripped off the property, if the proceed from the sale of the home is not enough to cover the second mortgage even in part. However, say, if the value of the house is $150k and the first mortgage is worth $149k, the second mortgage can be paid off in part. In this situation, the second lien cannot be removed from the property.
One should also keep in mind that lien stripping is associated with bankruptcy Chapter 13. In case of Chapter 7, the second mortgage lien remains on your property even after you are discharged from the bankruptcy. The lender cannot come after you after discharge from Chapter 7, but he can foreclose on the property to satisfy the lien.
The option of lien stripping is available in case of car loans. The car loan can be stripped off to the current value of the car. Thus, if a present value of a car is $11,000 whereas the lender holds a claim of $15,000 secured by the car, then the lender holds an unsecured claim of $4000. Thus, while reorganizing the debts, this $4000 will be stripped off the car loan. However, there are certain limitations on lien stripping on vehicles which are purchased within 910 days of the filing.
How would the lien stripping work if both first & second loan(HELOC) is owned by the same Bank? The value of the property is less than the 1st loan in today's market.
Hi Guest,
Though both the mortgages are with the same bank, I think you'll be able to strip off the second lien. You should contact your bankruptcy attorney and he'll be able to help you in this regard. Once the second lien is stripped off, you can pay off the first loan as per the payment plan given to you by your lender.
Thanks
Though both the mortgages are with the same bank, I think you'll be able to strip off the second lien. You should contact your bankruptcy attorney and he'll be able to help you in this regard. Once the second lien is stripped off, you can pay off the first loan as per the payment plan given to you by your lender.
Thanks
I was discharged from a chapter 7 last year. Now I want to stay in my home and wonder if I can file chapter 13 and strip my 2nd that has NO value. The house is now worth less than the 1st.
You'll be able to file Chapter 13 after your Chapter 7 has been discharged. As your property does not have any equity, you would be able to strip off the second lien. However, before taking any step, I would suggest you to consult your bankruptcy attorney.
Niicss is right in that he/she suggests you consult your bankruptcy attorney, but not necessarily right in the recitation of stripping. You have to be eligible for a discharge to 'stip' the second lien. While you might be able to file a Chapter 13 after a Chapter 7 discharge, you are not entitled to a Chapter 13 discharge if it has been less than 4 years since the Chapter 7 case, where a discharge was received, was filed. Therefore, no lien stripping.
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We have a 1sr and 2nd mortgage. The first is just under 128 and the 2nd which we took out for a business, is 86. The realtor appraised the house at 175, but said that more than likely it wouldnt sell because of all the foreclosures in the area. As the business has failed and we need to file bankruptcy, which do we file? And what about the truck? We have been trying to downtrade, but they keep telling us about the neg. equity in the truck that it wouldn't be worth it in order to save $50 a month. That truck is the only reliable vehicle we have.
Hi ines!
Welcome to forums!
I would suggest you to contact an attorney and discuss your case with him. He will be the best to let you know which chapter of bankruptcy will be best suited for you.
Sussane
Welcome to forums!
I would suggest you to contact an attorney and discuss your case with him. He will be the best to let you know which chapter of bankruptcy will be best suited for you.
Sussane
We have a first and a second. First is valued with late fees and penalties at 247.2k, our second is values at 80k. we just had our home appraised at 244k my attorney sayd we can gamble and file 13, but she cant guarantee they will strip the second because we dont have a 2% cushion. if we do a 13, then learn we cant keep the home, we can then turn it into a 7, but for a 600 charge of course. Sale date is in 3 weeks. do you think they will strip the second or should we give up now?
Hi jen!
Welcome to forums!
Your query has been answered in the given page:
http://www.mortgagefit.com/inprocess/about43220.html#180260
Take a look at it. Hope it helps you.
Sussane
Welcome to forums!
Your query has been answered in the given page:
http://www.mortgagefit.com/inprocess/about43220.html#180260
Take a look at it. Hope it helps you.
Sussane
my mortgage arrears is close to 70000 I want to file a chapter 13. what happens if i dont have enough income to pay the unsecured debt after paying the mortgage payment and the payment for the arrears
Hi Theresa,
In Chapter 13, you'll receive a payment plan to pay off the mortgage and the unsecured debt as per your financial situation. Thus, you won't face any issues in paying off your unsecured debts.
Thanks
In Chapter 13, you'll receive a payment plan to pay off the mortgage and the unsecured debt as per your financial situation. Thus, you won't face any issues in paying off your unsecured debts.
Thanks