Lien Stripping

A lien is a legal right or interest that a lender has in the property they gave a loan for, which serves as a security against the repayment of the loan. If a borrower fails to meet the loan obligations, the lender can enforce the lien to recover the amount owed through foreclosure. Lien stripping may help debtors keep their property by making it financially feasible to pay off the primary mortgage and any remaining secured debts.

As a Riverside bankruptcy attorney, I can help you successfully plan your Chapter 13 bankruptcy. Our firm excels in stopping foreclosures, stripping off burdensome junior liens, and reorganizing debts into manageable payments. Bankruptcy stops foreclosure by the automatic stay.

Junior vs. Senior Liens
The first mortgage is usually the senior lien, with any subsequent mortgages or lines of credit considered junior liens. Seniority is crucial because the senior lien gets paid off first in the event of a foreclosure. If there's not enough equity in the property to cover the junior liens, those lienholders may receive little to nothing from the foreclosure sale. Because lenders have less chance of being repaid in a Junior Lien during the event of a foreclosure or sale of property, they are riskier for the creditor. Due to the increased risk, junior liens often carry higher interest rates than the primary (senior) mortgage. Common types of junior liens include second mortgages, home equity lines of credit (HELOCs), and home equity loans. Other types can include judgment liens (resulting from a court judgment) and tax liens (for unpaid taxes) that are not the primary lien on the property.

Lien Stripping
Lien stripping is a process that can occur during Chapter 13 reorganization. During a Chapter 13 bankruptcy, you create a repayment plan to pay back part or all of your debts. Lien stripping can arise if the property's value is less than the amount owed on the first mortgage. The debtor must provide evidence of the property's current value to support the claim that a junior lien is wholly unsecured. During your confirmation hearing, the judge approves your repayment plan, including whether and how the junior liens are treated as unsecured debt. Lienholders may challenge the motion to strip the lien, requiring a hearing and further legal argumentation. Successfully stripping a lien and completing a Chapter 13 plan can significantly positively affect the debtor's credit score and future borrowing capabilities by reducing overall debt levels.

Lien stripping can directly impact a foreclosure situation in bankruptcy. By removing junior liens, the debtor may more affordably restructure their debt through a Chapter 13 repayment plan, potentially keeping their property and avoiding foreclosure on those junior liens. However, the primary mortgage (or first lien) must still be dealt with through current payments outside of bankruptcy, the Chapter 13 plan, or a loan modification. The unsecured portion of the junior lien is discharged upon completing the repayment plan. Your primary mortgage and senior lien must be included in the secured debt part of the repayment plan or loan modification. Your arrearages must also be paid to date to file your bankruptcy petition.

Example
If someone owes $250,000 on their first mortgage and their home is valued at $240,000, a second mortgage of $30,000 can be stripped off. Because the home's value does not cover the first mortgage, leaving no equity to secure the second mortgage.

Lien Release
After discharge, the debtor must ensure the lien is formally removed from the property title, which may require filing specific documents with the county recorder's office. To achieve a lien release the debtor or their attorney typically must file a motion or an application with the bankruptcy court to officially remove (or "strip") the lien from the property title. This step is crucial because the discharge of the debt itself does not automatically remove the lien. The bankruptcy court then issues an order that acknowledges the lien's removal based on the discharge of the associated debt. This order is the legal instrument that formally strips the lien. The debtor or their attorney must take this court order and record it with the county recorder's office (or similar local government property records office). This action updates the public land records, showing that the lien is no longer valid. Once the lien release process is completed, the lender's previous claim on the property is nullified. The lender cannot take action against the property to recover the debt, as it is considered satisfied for their security interest. The property is then free of the lien, clearing the title of that burden.

The release of a lien has significant positive implications for the property owner. It clears up the title, allowing for the sale, refinancing, or transfer of the property without issues related to the discharged lien. For the borrower, it represents a successful step towards financial recovery and stability post-bankruptcy.

If your property is in danger of foreclosure, reach out to me to an we can discuss how you can use bankruptcy as a tool to get your financial situation back on track.

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