Chapter 13 provides a unique opportunity to eliminate for all time voluntary mortgage liens on real property.
Lien stripping is an exception to the standard rule in bankruptcy that liens pass through bankruptcy unchanged by the bankruptcy discharge.
In Chapter 11 and Chapter 13 , when the value of the collateral available to secure the lien is less than the debt secured by the lien, the lien may be stripped off or crammed down to the value of the collateral that secures it.
The home mortgage exception
In times of fallen real estate values, Chapter 13 offers debtors a chance to eliminate for all time mortgage liens on their homes if there is no value at all to which the lien attaches.
When the lien in question is a mortgage on the debtor’s principal residence, bankruptcy law prohibits modifying or changing the lien. That protection for home lenders was added to the bankruptcy code in the 1980’s.
The exception to the exception is when there is absolutely no value to which the lien can attach. Then, even a voluntary lien on a principal residence can be stripped off.
Not your home
If the real estate is not your primary home, the law is different and less restrictive. It isn’t an all or nothing situation.
A plan of reorganization can divide the mortgage debt into a portion that is secured by value and a portion that is an unsecured claim. That’s called bifurcation.
Liens that impair exemptions
Contrast lien stripping to lien avoidance pursuant to § 522(f). There, only judicial liens such as judgment liens can be avoided if the property would otherwise be exempt.
Tax liens
Tax liens can be stripped off in reorganization proceedings (Chapters 11 and 13) to the extent that the lien does not attach to equity in property. Or they can be “crammed down” to the actual value in the collateral available to secure the lien.
More on tax liens in bankruptcy.
Tax liens can’t be avoided in Chapter 7 on the grounds that they impair exemptions; tax liens are not “judicial” liens, they are “statutory” liens.
More
Mortgage lawyer Bill Purdy on lien stripping as the silver lining in the mortgage mess.
Mortgage liens after bankruptcy
Image courtesy of USGS.
