I have already discussed this week how cramdowns can help debtors filing Chapter 13 who are upside down on car loans or some mortgages, but what if you are a consumer who owes more on your home mortgage than the home is worth? While you will not be able to cram down the balance of a mortgage on your primary residence, you may be able to take advantage of a process called lien stripping.
Lien strips allow debtors to convert second or third mortgages on their homes to an unsecured debt by making the lender remove its lien from the property. In order to strip a second mortgage or additional liens, the balance of the first mortgage must be more than what the debtor’s home is worth. If the balance on the debtor’s first mortgage is less than what the home is worth, then he or she will not be able to strip the second mortgage. However, if the combined balance of the first and second mortgages is greater than the value of the home, then a third mortgage, home equity line of credit (HELOC) or other junior liens could be stripped.
The great advantage of having a lien stripped is that a debtor’s second mortgage, HELOC or junior liens will become unsecured debt through his or her Chapter 13 plan, and remaining balance on the mortgage will be discharged as long as the debtor completes the repayment plan. However, it is important note that the second mortgage lien will only be stripped as long as the debtor completes the plan. This means that if the debtor’s case is dismissed before completing his or her plan, the lien will not be stripped.
It is also important to note that lien stripping will often involve having to determine the fair market value of your home. You will definitely want to speak with an experienced Washington DC or Maryland bankruptcy lawyer as to whether a formal appraisal, formal market analysis or a local listings comparison will work best for your particular needs.