Lien stripping is one of the considerable benefits for debtors filing Chapter 13, and it can provide great relief for homeowners who are facing negative equity in their homes along with a second or third mortgage. The burst of the real estate bubble and the foreclosure crisis hit the Chicagoland area hard, and it is important for homeowners to understand there is still help available for those drowning in underwater mortgages.
When filing for bankruptcy under Chapter 13, if a person’s home is worth less than the balance due on the first mortgage, the court can “strip off” the junior mortgages. This makes sense when one imagines the scenario of a sale of the home followed by bankruptcy. If a home with equity less than the first mortgage was sold, only the first mortgage lender will get any money and the second mortgage would then be unsecured debt, as there is no longer any collateral to attach. If the person then filed for bankruptcy after the sale, the unsecured debt would likely be discharged. By stripping down liens for underwater homes, the bankruptcy court is accomplishing the same outcome but without the necessity of a sale, allowing you to keep your house and the bankruptcy with only one mortgage.
This grants a huge benefit to debtors who can successfully complete their Chapter 13 plan. If a person did decide to sell the home but did not file for bankruptcy, the creditors will still have an unsecured claim against the debtor and would try to collect. To have a second or even third lien completely wiped clean makes it more than worthwhile to homeowners who have seen a marked drop in the value of their property.
U.S. Law Attorneys, Ltd. – Schaumburg bankruptcy lawyers