Lien Stripping in Bankruptcy
At The Sellers Law Firm our Montgomery, Selma and Central Alabama bankruptcy attorneys spend a good portion of each week stripping the liens off of the secured property of our clients. We know that the term “lien stripping” is likely a new concept to you so we will try to explain. A Chapter 7 bankruptcy or Chapter 13 debt consolidation bankruptcy makes it possible to cancel or strip liens on a debtor's assets. This might mean that only part of the secured debt can be removed or if there are two liens on a piece of property, one entire lien may be able to be “stripped” off the property. Which liens can be stripped depends on various factors and the type of bankruptcy that is filed. First, the kind of lien must be considered and second, whether the case is a Chapter 7 or Chapter 13. Third, consideration must be given to the value of the asset to which the lien is attached. There are different rules for the various combinations of liens and different rules a lien that is involved in a Chapter 7 bankruptcy or Chapter 13 debt consolidation.
There are various types of liens. A voluntary lien is one such as a mortgage, deed of trust, or home equity line of credit. A voluntary lien is one in which a borrower typically grants the lien to secure a loan to the creditor. The second type of lien is a judicial lien. These are liens that are due to a judgment against the debtor from a lawsuit. The third most common type of lien is a statutory lien. This is a lien that is created by law. The most common type of statutory liens would be income tax liens and property tax liens.
In a Chapter 7 bankruptcy the only type of liens that can be stripped are liens that impair an exemption to which the debtor is entitled; however in a Chapter 13, almost every type of lien can be stripped or reduced to the value of the collateral to which it attaches. The only one exception would be that a first mortgage on a principle residence cannot be stripped.
The reasoning behind allowing a debtor to strip a lien in a Chapter 7 bankruptcy or Chapter 13 debt consolidation is to ensure that the debtor is allowed a measure of exempt property, and that the liens that are really truly worthless at the time of filing of the bankruptcy petition are eliminated. To determine the value of the lien, we must look at the market value of the property and the amount of any liens that are attached to the property. This includes both real and personal property. When determining which liens can be stripped, our Montgomery, Selma and Central Alabama bankruptcy attorneys must determine the order of the liens that are placed on that property. An easy rule of thumb is “first in time, first in line.” This means that the first lien is going to be the first one, and possibly only one, to get paid. The formula in calculating how to strip your lien is to calculate the market value of the collateral minus the payoff amount of the debt of any senior lien.
The stripping of voluntary liens which are secured only by the debtor’s residence is strictly prohibited by the bankruptcy code. This means that under secured first mortgages on the deed cannot be reduced to the present value of the property; however, liens on automobiles and mobile homes can be reduced if it meets the 910 Rule. Some federal courts do not allow this; however, this is the rule in Alabama. Also, the stripping of a lien on an automobile or mobile home is commonly referred to as a “cramdown.” A “cramdown” is when you reduce the debt to the value of the personal property such as a car or mobile home. (Please see our section on Mobile and Manufactured Homes).
Our experienced bankruptcy attorneys can guide you through the process of lien stripping when we file your Chapter 13 or Chapter 7 case. All consultations are always free, and we can usually meet with you within 24 hours. Also, our phone lines are answered 24 hours a day! We have offices located in Montgomery, Selma, Greenville, and Troy. You may email us at firstname.lastname@example.org. You may call or text us at 334-LAWYERS (334-529-9377) or use the Contact Form on our website. Remember that doing nothing, changes nothing so act today!
The Sellers Law Firm is designated a debt relief agency by an Act of Congress and the President of the United States. We have proudly assisted people seeking relief under the U.S. Bankruptcy Code for four decades.