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Common Concerns & Questions About Bankruptcy

Overview of the practice of lien stripping in Chapter 13

| Dec 5, 2019 | Chapter 13 |

One of the benefits of a Chapter 13 bankruptcy is that those who are filing it can realistically strip off liens that may be against their property.

Lien stripping only works when a person owns property with no equity in it. A person has a property with no equity, or negative equity, when the amount of secured debt, for example in the case of a mortgage or a car loan, is more than what the property is worth.

Talk of people being upside down in the mortgage is an example of someone having negative equity in a piece of property.

While it is not always the case, a person who is upside down on his or her most valuable assets often has other financial problems as well. The problem with filing bankruptcy in these situations is that, generally speaking, secured debts have to be repaid unless the person is willing to part with the car, house or whatever collateral is being secured.

The good news is that, in a Chapter 13, a technique called lien stripping may be available. Whether lien stripping is available in one’s given situation depends heavily on individual facts and circumstances. If a Tyler resident has a question about lien stripping, he or she should speak to an experienced bankruptcy attorney.

However, the basic idea is that, when a Texas resident has negative equity in a piece of property, he or she may be able to effectively convert a portion of a secured loan into an unsecured debt like a credit card.

For example, if a person owns a house worth $150,000, and has two mortgages at $150,000 and at $30,000, he or she may be able to treat the $30,000 mortgage as unsecured and thus disregard the lien. This is advantageous because it means the holder of the second mortgage loses the right to foreclose. Moreover, in a Chapter 13 plan, unsecured debts may only be paid at pennies on the dollar.