"Lien stripping" is a process where a debtor
can "strip down" the claim of a secured creditor to the
fair market value of the collateral securing the debt. Lien-stripping
is not allowed in state courts, and is available only to those filing
bankruptcy. It allows payment of only the "secured portion"
of the debt, usually completely eliminates the "unsecured portion",
and allows payment of the debt over time with a new interest rate
based on current market conditions.
Restrictions
on a Principal Residence
It is generally available in Chapters 11 and 13, subject
to certain restrictions on a principal residence. However, if it is
a second mortgage, and there is no equity to which it can attach,
i.e., the lien is completely "underwater", then the law
treats it as if there were no lien, and the lien can be stripped off
the property.
Chapters
7, 11 and 13
Lien-stripping is not available in Chapter 7, and the secured debts
simply "ride through" the bankruptcy filing. In Chapters 11 and 13,
lien-stripping is generally available, and subject to certain restrictions on
a principal residence.
- Chapter
7 - Lien-stripping is not available in Chapter 7, and the secured debts
simply "ride through" the bankruptcy filing.
- Chapter
11 - In Chapter 11, where the debt is secured only by a lien on property
that is the debtor's principal residence, the lien cannot be stripped down to
the value of the collateral. This is due to the "anti-modification"
provisions of 11 U.S.C. Section 1123(b)(5). However, if it is a second mortgage,
and there is no equity to which it can attach, i.e., the lien is completely "underwater",
then the law treats it as if there were no lien, and the lien can be stripped
off the property.
- Chapter
13 - In Chapter 13, there can be no lien-stripping where: the debt is
secured only by the debtor's principal residence; where the collateral is a car
and it was bought within 910 days before the bankruptcy filing; and where the
debt is purchase money, is secured by "any other thing of value", and
was incurred within 1 year prior to the bankruptcy filing.
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Summary
Lien-stripping is not allowed in state courts,
and is available only to those filing bankruptcy. Before filing the
case, however, the attorney should review the facts and see if lien-stripping
will be available in the debtor's particular case and determine if
this is a viable strategy.
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Written
by Henry
Rendler