What is Lien Stripping?

There are a lot of creative things debtors and their attorneys can do with secured claims in a Chapter 13 bankruptcy case. One of these things is the concept of lien stripping. Still affected by the economic recession, many individuals are in the unfortunate state of being “underwater” on property that they own. The term “underwater” means that a property owner owes more on a piece of property than the property’s market value. In certain situations, the debtor may divide the claim of a secured creditor into two different claims, a secured claim for the market value of the collateral and an unsecured claim for the balance. When it comes to property and bankruptcy, it is important to consult an experienced Merrillville bankruptcy attorney to review and determine the best options for your unique situation.

How does Lien Stripping Work?

As explained above, a Chapter 13 debtor can divide the claim of an undersecured creditor. This means that a creditor has a secured claim for the value of the collateral and an unsecured claim on the balance of the debt.

In a Chapter 13 bankruptcy case, the debtor creates a plan to repay his or her debts over a period of three to five years. Under bankruptcy law, the Chapter 13 plan must provide that secured creditors are paid at least the market value of their collateral over the length of the plan. In certain situations, bankruptcy law allows the debtor to pay the amount of the secured claim, with interest thereon, but allows the debtor to treat the unsecured portion of the claim along with all other unsecured claims. In reality, this usually has the effect of paying the secured claim in full, thereby releasing the lien upon the debtor’s property, while the unsecured claim receives a very small percentage of the balance.

Example of How Lien Stripping Works

Lien stripping is commonly used in situations involving real estate and vehicles. It is subject to the exceptions listed below. For example, a debtor may operate a business as a sole proprietor and have a vehicle that he uses for the business. He files for bankruptcy and has a truck that he bought for $25,000 three years ago that he financed the full amount through the bank and still owes $20,000 on the loan. According to NADA, the market value of the truck is $18,000. In his Chapter 13 plan, it is possible for him to split the bank’s claim into two different claims, an $18,000 secure claim and a $2,000 unsecured claim.

A debtor may strip the 2nd mortgage on his real estate if the value of the real estate is less than the amount owed on the 1st mortgage. For example, if your real estate is worth $100,000 and the first mortgage is owed $105,000, then the entire second mortgage may be stripped.

Exceptions and Limits on Lien Stripping

Depending on a debtor’s situation and the types of creditors and debts that he or she has, lien stripping may or may not be a tool available to a debtor and his or her attorney.

Lien stripping cannot be used in the following circumstances:

• In Chapter 7 cases;
• On purchase money security interests in motor vehicles used by the debtor for personal use and purchased within 910 days of the bankruptcy filing;
• Other purchase money collateral purchased within one year of the bankruptcy filing; and
• Claims secured only by a lien upon the debtor’s residence.

Contact an Gary Bankruptcy Attorney

Because of the nuances in the bankruptcy law, it is important that you contact experienced Merrillville Bankruptcy Attorneys at Whitten & Whitten to help you navigate the complexities of your case. Attorney Schmidt can help you review your property and determine the best strategy for dealing with your property and your creditors through bankruptcy. Lien stripping is only one of the options that may be available to you. Contact Whitten & Whitten today at 219-756-0555 to schedule a free consultation.