Learn About Chapter 13 Lien Stripping From San Gabriel Valley Bankruptcy Attorney Jeffrey Hsu

Posted by on Sep 4, 2011 in Chapter 13 Bankruptcy Issues, Foreclosure & Bankruptcy | 0 comments

In many chapter 13 cases filed today, a critical issue arises over lien stripping of a debtor’s residence.  Oftentimes a debtor believes his or her home is worth significantly less in market value than what the secured lender believes.  This matters particularly in cases where a debtor seeks to retain a home in bankruptcy by “stripping off” a second or third lien on the home.

Lien stripping refers to situations where junior liens are treated as unsecured claims under a chapter 13 plan where the protections under 11 U.S.C. Section 1322(b)(2) no longer apply to the junior lienholder because the outstanding balance owed to one or more senior lienholders is greater than the value of the property given as a security for that loan.  For example, a common scenario involves a homeowner in bankruptcy stripping off a HELOC – a Home Equity Line of Credit under a scenario where the fair market value of the home is worth less than the outstanding balance of any pre-existing mortgages or deed of trusts that were in place before the HELOC was taken out.  Imagine a home is worth $50,000.00 with a first mortgage on the home for $70,000.00 and a HELOC of $20,000.00.   The home is considered “under water” because the balance owed on the first mortgage balance is greater the actual value of the home.  In such a scenario, the HELOC may be treated as an unsecured claim under the chapter 13 plan, and thus it is “stripped off” or the “lien is stripped off” for purposes of chapter 13.

Stripping off a lien benefits the debtor because the debtor may then be justified in paying off less than 100% of the outstanding balance against the HELOC and/or any other stripped off liens against the home.  How much the debtor must repay is entirely fact specific and depends on the particular circumstances surrounding that particular debtor.

It is important to remember that lien stripping in chapter 7 cases is prohibited generally under the Supreme Court case of Dewsnup v. Timm, 502 U.S. 410 (U.S. 1987) and other subsequent cases intepreting Dewsnup.

The practices and procedures of lien stripping vary district by district and sometimes even between judges within the same district.  At JCH Law Firm, we have experience confirming chapter 13 cases involving lien strips and identifying when lien stripping is a possible alternative in a chapter 13  California bankruptcy case.   Contact us now for more information or call us at 1-800-371-5523.

Attorney Jeffrey Hsu practices Southern California Bankruptcy and files bankruptcies for residents of LA County, Orange County, and Riverside County.  Our office is located in the heart of  San Gabriel Valley & Los Angeles County in Alhambra, CA.

 

 

 

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