I thought the lien stripping ship had sailed.
We are finally climbing out of the worst of the Great Recession and California real estate values are recovering.
Turns out, I was wrong.
It’s not too late to reduce your mortgage debt by tens, or even hundreds of thousands of dollars, if you live where real estate prices are recovering slowly.
It doesn’t require a loan modification, a cooperative lender or a government program.
It requires only the right mix of property values and junior mortgages, and a willingness to file Chapter 13.
Chapter 13 bankruptcy permits a homeowner whose first mortgage and any delinquent property taxes total more than the property’s value to eliminate any HELOC or junior mortgage.
Recovery in property values uneven
With an office on the San Francisco Peninsula, where property values are booming again, I thought the moment for lien stripping was gone. But a phone call from a real estate attorney in Santa Cruz County showed me that opportunities still exist.
The value of his client’s home remained less than what he owed on the first mortgage. The second mortgage can be vaporized if the homeowner files Chapter 13 while those values hold.
Since the right to strip off a voluntary lien is fixed by the values at the beginning of the case, increases in property values in the future don’t imperil the lien strip. It’s the values on the date that the case is filed that matter.
How lien stripping works
To strip a voluntary lien, you need to file a motion (in our Northern California courts, at least it’s a motion) in your Chapter 13 case to establish the value of the property and the total of the debt that is senior to the lien to be stripped.
If the value of the property leaves no value to secure the junior lien, it isn’t a secured claim and isn’t protected by laws against modifying home loans through bankruptcy.
Note that it’s not enough that your home is worth less than all the liens on it. It must be worth less than the first mortgage and any taxes unpaid.
The junior lien is not gone for good until the homeowner completes the Chapter 13 plan, which is usually five years. But during the bankruptcy case, no payments are made on the junior lien.
Chapter 13 plan may call for payments to the trustee that are far less than the monthly payment on the loan to be wiped out.
When the last payment on the Chapter 13 plan is made, the court will issue a judgment that makes both the loan and the lien that secures it void for all time. Without negative tax consequences.
That’s the silver lining in a slow recovery, if you act to take advantage of it.
More about Chapter 13
Who writes the Chapter 13 plan
What happens if life happens during the plan
Image licensed via Creative Commons by Timothy Valentine