Lien stripping is the process that can transform 2nd liens on homes into mere unsecured debt. Most people understand that as long as a lender has a lien on your home, they can foreclose if you don’t pay. But if the lender no longer has the lien, then the debt can potentially be discharged (wiped out) in a bankruptcy. However, there are several limitations on the lien stripping process in bankruptcy:
First, in Texas, you can only use lien stripping for chapter 13 cases. You cannot use it for chapter 7, and if you commence a chapter 13 case with lien stripping and then later convert it to chapter 7, then the lien is not stripped.
Second, the lien that you intend to strip must be completely unsecured. For example, if you still owe $200,00 on your primary (1st) lien and $50,00 on your 2nd lien and your house is worth $215,000 then the 2nd lien is still partially secured. Therefore, it cannot be lien stripped AT ALL. In this example, it could only be stripped if the value of the house falls to $200,000 or below.
It is also important to remember that once a lien is stripped, the debt does not instantly or completely disappear. The debt associated with the lien is first transformed into unsecured debt once it is stripped. That means it is treated as if it were credit card debt in the bankruptcy case. In many chapter 13 cases you are required to pay a portion of your unsecured debt. Although that portion is typically small, it means you may still be required to pay a portion of it through the bankruptcy plan. You must also complete the bankruptcy payments and get a discharge before the lien will disappear. Once the lien is stripped, you are not required to pay any of the 2nd lien payment directly to the lender. Instead, you will pay the portion of unsecured debt that is required for your case directly to the Trustee.
This process is not simple, even for an experienced bankruptcy attorney. That being said, you can expect there will be extra attorney fees (in addition to the usual fee for chapter 13). However, if you meet all the above criteria for lien stripping, the extra fee is usually worth it.
As with any legal matter, you should always discuss your particular situation with an attorney who is experienced in such matters to determine if it will be beneficial to you. If you are considering filing for bankruptcy, the experienced bankruptcy attorneys at the Fears Nachawati Law Firm can give you the thorough education and guidance needed to navigate through the bankruptcy process and get back on track to financial stability. For a free consultation, click here or contact our office at 1.866.705.7584.