Thursday, January 15, 2015

Chapter 13 - Lien Stripping





LIEN STRIPPING:  AVAILABLE IN CHAPTER 13, BUT NOT CHAPTER 7
Liens typically are unaffected by the bankruptcy discharge, and remain burdens on real property after the debtor no longer has any personal liability for the debt.  However, lien stripping, which is an adversary proceeding (a federal lawsuit within your federal bankruptcy case) to obtain an order avoiding the lien is possible in Chapter 13, but only if you complete the plan.  Even if you win the adversary proceeding, the lien will be reinstated if your case is dismissed and you don't obtain a discharge.



Strict requirements must be met.  You must have an appraisal showing the value of your home is less than the balance on the 1st mortgage. Use http://www.zillow.com/ for an initial estimate of the value of your home.  If the value is even one dollar more, then lien stripping (of the 2nd lien) is unavailable.  Since appraised values are typically a range, contested issues regarding value may result making the process uneconomical.  However, for a certain group of homeowners who have suffered precipitous drops in their home value, this can allow building of home equity.

If you are not eligible for lien stripping, but are seriously under water on your home, you may have what amounts to a disposable rental house for which you may get some tax advantage, but will never build equity.  For example, if your house is worth $300K, but you owe $400K on the 1st mortgage and $100K on the 2nd, then it does not make sense to keep making the payment on the 2nd after your discharge.  The lender won't foreclose as long as you are current on the payments on the 1st mortgage because the foreclosure sale price will be less than $300K and the lender will get nothing from the sale and is barred by the discharge from suing you.  The lien remains on the property like a cancer eating away any hope of ever building equity.  You have no incentive to do maintenance on the house let alone improve it.  When you are ready to move, you simply default on the 1st mortgage, and let the lender foreclose.  You live for free until they do, and can't be sued for any deficiency.  This is a public policy misalignment that needs to be addressed by the Washington Legislature because these unmarketable homes in which debtors are required to make principal payments that they will never see again, are unmaintained foreclosures waiting to happen damaging economic recovery and impairing the fresh start of debtors.  Below is a link to an amortization schedule calculator which will show the amount of your required principal payments on your mortgage by year.
 http://www.myamortizationchart.com/

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chris@mulvaneylawoffices.com