Using Chapter 13 Lien Stripping to Reduce Secured Debt

One of the chief benefits of a Chapter 13 bankruptcy is the ability to shield your home from mortgage foreclosure. But what if you have a second or third mortgage or a home equity lien on the same property? Through a process known as lien stripping, you may be able to reduce or eliminate those additional debts while preventing those lenders from seeking to foreclose.

Money owed to a mortgage or home equity lender is a secured debt, which means it is not included in a Chapter 13 repayment plan. Although you can pay off your arrears over the life of the plan, you will need to keep up with the mortgage payments going forward and the mortgage lien remains in force. However, the actual value of the property may be insufficient to satisfy the first mortgage, much less any junior ones. As such, the junior lenders’ liens are essentially unenforceable.

In recognition of this reality, bankruptcy law allows for lien stripping, which converts a junior mortgage from a secured debt to an unsecured debt. Though the loan remains in effect, the junior lender no longer has a legal claim on the underlying property. The junior loan is added to your other unsecured debts, which may include money owed on credit cards and for medical expenses.

Unsecured debts are included in your Chapter 13 plan, which means they are repaid over a three- to five-year period as your resources allow. Any disposable income —the amount left over after subtracting your allowed expenses from your monthly gross income — is divided among the unsecured lenders. Whatever unsecured debts remain at the conclusion of the repayment plan can be discharged by the court. Often, much or all of the debt owed on junior mortgages goes unpaid.

Filing for Chapter 13 and committing to the process is one of the best ways to continue living in your house while you work toward financial stability. If mortgage payments are your main source of debt and you are in danger of foreclosure but want to avoid bankruptcy, an acceptable alternative may be a mortgage modification or surrendering the house via a deed in lieu of foreclosure.

The attorneys at Jeff Field & Associates in Scottdale, Georgia guide homeowners through their debt relief options with care and consideration. With additional offices located throughout Metro Atlanta, we are committed advocates for North Georgia residents. To schedule a free initial consultation with one of our knowledgeable lawyers, call 404-381-1278 or contact us online.