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Understanding lien stripping

Chapter 13 bankruptcy is a viable option for getting out of debt for both individuals and businesses. In 2010, the United States saw over 400,000 Chapter 13 bankruptcies filed, and a majority of those were from families.

Bankruptcy is a complicated area. There are numerous aspects of the process people need to familiarize themselves with, and that includes lien stripping. Anyone who hears their attorney casually mention lien stripping should take the time to learn about this concept. 

What does lien stripping involve?

Lien stripping is a part of the bankruptcy process that involves eliminating certain junior liens from a person's debt. Junior liens can include second or even third mortgages on a building. As a result, the person either does not have to pay back these debts, or the person has to pay back a very small amount. Lien stripping depends on the person successfully making payments on the restructured plan. During a bankruptcy, the person still needs to make monthly payments of a certain amount for a set number of years. As long as the person can make those payments, the court will most likely discharge any unsecured debts. 

How do courts determine which debts face elimination?

Whether or not lien stripping can take place depends on the value of various mortgages as well as the overall value of the property. For example, if a homeowner has a $500,000 mortgage on a house valued at $500,000, then those debts would remain secured. However, if the homeowner had an additional second mortgage worth $100,000, then the second mortgage could become stripped away. 

However, if a homeowner owns a $500,000 house and has a first mortgage worth $300,000 and a second mortgage worth $200,000, then the court would most likely view both as secured. There are numerous nuances of bankruptcy law, and people filing for it need to make sure all paperwork submitted is perfect to ensure the elimination of unsecured debts following completion. 

 

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