Talking About Bankruptcy Services

How Lien Stripping In Chapter 13 Can Benefit Your Financial Situation

15 May 2015 by Carlos Gomez

Chapter 13 bankruptcy is not always the preferred option to use, but it does have its advantages over Chapter 7. One advantage you might be interested in learning about is called lien stripping. This is something that is commonly used in Chapter 13 bankruptcy cases, and its purpose is to remove second and third liens from homes.

What is Chapter 13?

Chapter 13 bankruptcy is one of the options available to people that are struggling with debt. Through this branch of bankruptcy, you will be placed on a repayment plan with your creditors, which will last up to five years. While you will have to repay a lot of your debts, there is a chance that you may be able to get by with only paying a certain percentage of them.

There is also a chance that you will qualify to get your second and third loans from your house discharged in full. This is called lien stripping, and if you can do this, it could help you avoid losing your home, and it could help you get out of debt faster. This is not something that you can usually do in a Chapter 7 bankruptcy case.

How Does Lien Stripping Work?

In Chapter 13 cases, all of the debts you have are included in one plan. You will make payments to the trustee for the debts, and the trustee will use your payments to pay your creditors. This will last for a certain number of years, and one of two things will happen to these debts at the end of this period:

• All secured debts (such as a house loan or car loan) will convert to debts that you must begin paying. This means that at the end of your bankruptcy, you will begin making your mortgage payments directly to the lender instead of to the trustee. The same is true for your car payments.
• All unsecured debts (such as credit cards or medical bills) that still have balances at the end of the bankruptcy will be forgiven. This means that you will no longer owe any money for any unsecured debts you have.

When lien stripping takes place, your second and third mortgages are converted from secured debts to unsecured debts at the start of the bankruptcy. This means that you will be making payments on these debts during the bankruptcy plan, but the remaining balances at the end of the plan will be discharged.

Does Lien Stripping Automatically Happen?

The downside to lien stripping is that there are rules that require you to qualify for this before it happens. When you file for Chapter 13, the court will compare the value of your house to the loans you have on it.

If the value of your house is more than your first mortgage, you will not qualify for lien stripping. If the value of your house is less than the amount you owe for your first mortgage, you will qualify for lien stripping on your second mortgage.

If you have a third mortgage on the house, you can have the lien stripped from it if the value of your house is more than the amount you owe on your first loan, but less than the amount you owe on your first and second mortgages combined. In other words, you could qualify to have your third loan stripped without having your second loan stripped.

Getting your loans stripped could be highly beneficial for your financial situation, but unfortunately, this is not always an option. If you would like to learn more about lien stripping in Chapter 13 bankruptcies, go to websites or contact a bankruptcy lawyer in your area.

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