S is for Strip in my Bankruptcy Alphabet. Bankruptcy lawyers delight in stripping liens from people’s homes.
In any chapter of bankruptcy, a debtor can void judgment liens that have attached to assets that would otherwise be exempt.
In Chapter 13, tax liens and other statutory liens can be stripped off the asset if there is no value in the asset, after considering liens that were perfected earlier, for the lien in question to attach to.
But the crowning feat in Chapter 13 is to strip off a voluntary mortgage lien on a home.
Wipe out mortgage lien
When is it possible to strip off a mortgage lien? In the 9th Circuit, and several other circuits, when there is not a single dollar of value for the mortgage to attach to.
When that’s the case, the Bankruptcy Code says that the lien simply isn’t an allowed, secured claim. And only allowed secured claims are protected from modification by §1322.
That’s a long, lawyerly explanation of how Chapter 13 bankruptcy can utterly eliminate thousand or even hundreds of thousands of dollars in debt that once encumbered a home.
Elements required to strip mortgage
The debtor’s ability to strip a mortgage lien is dependent on three things:
- The value of the home in today’s market
- The sum of the liens on the home senior to the lien to be stripped
- Completion of the Chapter 13 plan
During the Chapter 13 plan, the loan underlying the stripped lien is treated and paid (or not) just like all other unsecured claims.
At the end of the Chapter 13 plan, the lien representing the stripped mortgage is forever void, and any personal liability that the homeowner had to the lender is discharged.
Lien stripping alone is enough for homeowners to think about filing Chapter 13 even if the balance of their debts are manageable.
I’m sure my mother never dreamed I’d grow up to be a stripper!
This post has been brought to you by the letter S.
Jay Fleischman, New York bankruptcy lawyer and the guy who started the alphabet madness, claims S is for Security Interest
Image courtesy of Leo Reynolds.