If you're at all familiar with the two most common bankruptcy filings, the Chapter 7 and the Chapter 13 bankruptcy, you know that the Chapter 7 filing has the effect of discharging all of your debts beyond the amount that you pay back by turning over your non-exempt funds and assets to a bankruptcy trustee. The Chapter 13, on the other hand, is more like an extended repayment plan. You keep your assets and pay your debts back slowly over the course of a few years. You may not realize that it is occasionally possible to have certain debts, like a home equity line of credit or a second mortgage, discharged in a Chapter 13 bankruptcy through a process known as lien stripping. Here are a few things you should know about lien stripping if you're considering a Chapter 13 bankruptcy.
Why Not Just File a Chapter 7?
If discharging a debt is your goal, you may be wondering why you shouldn't just file a Chapter 7 bankruptcy instead, since the Chapter 7 discharges most of your debts in far less time than a Chapter 13 takes. There are, of course, multiple reasons why one type of bankruptcy filing might be better than another in any given situation, but the answer to this question often comes down to assets.
Whether or not you're looking to have a lien stripped, if your bankruptcy attorney is recommending a Chapter 13 bankruptcy, it's probably because you have too many non-exempt assets that you'll need to liquidate and turn over for a Chapter 7 bankruptcy. Many people who choose Chapter 7 filings have little or no assets that are non-exempt. Having a lien stripped may make it a little easier to complete your Chapter 13 bankruptcy successfully.
When Do You Qualify for Lien Stripping?
Usually, you would pursue the lien-stripping option if you're underwater on your mortgage – in other words, if you owe more money to the mortgage company than what your home is worth. You'll have to demonstrate this to the bankruptcy court. Just looking up the home values in your area isn't going to be enough.
You'll have to have your home professionally appraised, and you'll need an appraiser that's willing to testify in court to the current value of your home. The mortgage lender may try to dispute your appraiser's valuation of the home. If that happens, your attorney may be able to negotiate with the mortgage company to arrive at a value that you can both agree on. Otherwise, a judge will decide whether to take the lender's word on the value of the property or the word of your appraiser. It's a good idea to choose an appraiser with a solid reputation and unimpeachable credentials for this task.
What if Your Spouse isn't Also Filing for Bankruptcy?
If you're married, and you plan on filing for a Chapter 13 bankruptcy and looking into lien stripping, make sure that your spouse is on board if you own property jointly, and that your spouse is eligible for a Chapter 13 bankruptcy. Property jointly owned by a married couple is considered to belong as a whole to the couple; neither spouse individually is considered to own just one part of it. Therefore, one spouse can't strip the whole mortgage lien, and he or she also cannot simply strip their own share. Both spouses have to be eligible to strip the lien.
The legal outcome might be different if the property is not jointly owned. However, if the property could be considered marital property – like a house that both parties live in, located in a community property state – it's probably a good idea to include both partners in the bankruptcy filing, since both will benefit from the lien stripping. Otherwise, the lender may attempt to go after the non-filing spouse to collect the debt at a later point.
The lien stripping process is extra work for your attorney, so your attorney will usually require you to pay an additional fee for this service. The fees should be included in the Chapter 13 bankruptcy payment plan, along with the usual fees for a bankruptcy filing. If you owe more money than your home is worth and you have a second mortgage or home equity line of credit, ask your bankruptcy attorney if lien stripping in chapter 13 bankruptcy is right for your situation.