HOW LIENS ARE HANDLED IN BANKRUPTCY
If you have a mortgage, second mortgage or past due tax debt, there could be a lien on your home. In the event that the property is sold, any person or entity that has an interest in it would be allowed to collect any balance that the party or parties are owed. However, junior liens on a home may be stripped in a Chapter 13 bankruptcy case.
WHAT IS LIEN STRIPPING?
Lien stripping converts a secured home or other real estate loan into unsecured debt. This is important because unsecured creditors are typically given a lower priority compared to secured creditors. Therefore, it may mean that a debtor is required to pay less per month under the terms of his or her Chapter 13 bankruptcy repayment plan.
If there is a balance remaining on an unsecured debt at the end of the three- or five-year repayment period, it will be discharged at that time. A Las Vegas bankruptcy attorney can explain how this may apply in your case.
ARE THERE LIMITS TO LIEN STRIPPING?
There are a couple of important points to consider when asking for a lien to be stripped. First, the value of the first mortgage taken on the home must be more than the market value of the home itself. Second, it may not be possible to strip junior liens in a Chapter 7 bankruptcy case even if the value of the home is less than the value of the first mortgage. This is per a June 2015 Supreme Court ruling in the case of Bank of America N.A. v. Caulkett.
While bankruptcy may offer debt relief, the extent of such relief depends largely on unique factors related to a given case. Therefore, individuals may benefit from analyzing their financial situation prior to determining if bankruptcy is in their best interest.