If you've been thinking about filing for Chapter 13 bankruptcy, you may want to talk with a bankruptcy attorney about how to handle your home mortgage balance. If you have more than one lien on your home, you may want to talk with your attorney about the options available to you for dealing with those additional loans. You may even be able to have those loans eliminated under the terms of your bankruptcy using a process called lien stripping. Here's a look at what lien stripping is and what it can do for you.
Lien Stripping Basics
The process of lien stripping permits a person who is filing Chapter 13 bankruptcy to eliminate second or third mortgage loans in the process. In order to qualify, though, you must currently owe more on your primary mortgage than your house is actually worth. If this is the case, any additional liens will be technically considered as unsecured debt, because there is insufficient value in your home to cover all of the liens outstanding on it.
This process is effective because mortgage lien priority is determined by the age of the lien. If you file bankruptcy, your first mortgage will get priority in the settlement. If your home goes into foreclosure, the proceeds of the sale will be distributed to your primary mortgage lender first. If there are any remaining proceeds after paying that loan, each subsequent lienholder will be paid.
In the event that you owe more on your first mortgage than you can get from the sale of the house, your second and subsequent mortgage lenders won't receive any funds. This is an important determination, because your second mortgage must be deemed unsecured in this manner to be considered for lien stripping.
As an example, if you have a primary mortgage with a balance of $432,000, a second mortgage with a balance of $125,000, and a home that is valued at $397,000, your second mortgage will be considered unsecured and may be stripped through your bankruptcy proceeding.
What Determines Your Property Value?
If you are considering the possibility of lien stripping in chapter 13 bankruptcy, you'll need to understand the property valuation process. You can't simply provide your own estimate of your home's value as part of the process. Instead, you'll need to hire an appraiser to do a thorough inspection.
In some cases, you mortgage company may disagree with the value assigned by the appraiser. If this happens, you'll need to be sure that your appraiser is willing to go to court and defend the assessment. This makes it important that you work with a licensed professional who can show enough experience to be deemed an expert in the court.
If your mortgage company does decide to dispute the valuation, you'll have to leave the determination up to the judge. He or she will consider all of the information presented and then assign a property value. The judge may uphold your property appraiser's value, or may assign a value that is somewhere between your appraiser's value and the mortgage company's claimed value based upon the evidence provided.
What Happens to the Stripped Lien?
Just like other unsecured debts, the stripped mortgages will be dismissed, receiving only a small settlement payment, if anything. These loans will be bundled with your credit card balances and other similar expenses, and when your liquidation is complete and the funds distributed, the remaining balance will be charged off and removed from the lienholder records on your home.
If you've been considering filing bankruptcy but find yourself hesitant because of an outstanding second or third mortgage loan, talk to an attorney about the possibility of lien stripping. With the information presented here, you can approach the process with an understanding of what to expect.