Sunday, August 26, 2012

Lien Stripping in Chapter 13

Chapter 13 involves the discharge of the personal obligation to pay most types of debt in exchange for the debtor’s best efforts to repay creditors over a 36 to 60 month reorganization of debt.  The duration of the reorganization plan and the amount of the monthly payments required are based on the application of a formula commonly known as the means test.

In addition to the elimination of the personal obligation to repay creditors, chapter 13 also allows homeowners to strip, or eliminate, junior liens (e.g., home equity line of credit or judgment liens) from their homes.  The end result is that the homeowner keeps the home but never has any further obligation to pay the stripped junior liens.  This lien stripping feature of bankruptcy is not available in chapter 7 cases.

To qualify for chapter 13 a homeowner must have regular income, secured debts under $1,081,400, and unsecured debts totaling less than $360,475.  And to qualify for a lien strip, the appraised value of the home must be less than what is owed on the first mortgage.

As an example of what is possible in these lien strip cases, one of my current clients is paying approximately $250 per month for 36 months, and at the end of that period she will retain all her property, be completely debt free, and only the first mortgage lien will remain.

It is crucial to consult with experienced bankruptcy counsel to ensure that the means test is properly calculated so that the lowest payment and shortest duration plan is approved.  For qualified homeowners, the attorney’s fees can be paid through the monthly plan payments (effectively coming out of what would otherwise go to the creditors of the case) so the “out-of-pocket” cost to the homeowner can be remarkably low.