It is a sign of the times that almost on a daily basis we are hearing reports that the number of foreclosed homes is increasing as more and more hardworking Americans lose their jobs or suffer a serious diminution in income. The housing crisis has now moved way beyond the subprime and “Alt-A” borrowers into the loans that were made to folks who were considered relatively secure in their jobs and had a steady income – namely the middle and upper middle class. This situation has resulted in countless homeowners who are slowly but surely drowning in debt from everyday bills and whose homes are “underwater” or “upside down” – meaning that they owe more on their home than it is worth. The good news is that there is help out there for those who seek it.
Help can be found courtesy of your local chapter 13 attorneys who can commence a legal process known as “lien stripping” which can eliminate second and third mortgages and home equity lines of credit on homes that have depreciated in value. This is done in the context of Chapter 13 form proceeding brought on behalf of the homeowner in Bankruptcy Court. So what is chapter 13? A Chapter 13 is basically a type of Court-supervised debt repayment program.
Lien stripping gives homeowners the opportunity to sell or refinance and, in many cases, helps prevent the loss of their home to foreclosure. If a case is commenced in Court, creditors would no longer have the right to foreclose if payment is not made, the debt itself can be eliminated as part of Chapter 13 bankruptcy.
During the lien stripping process you are required to file a Chapter 13 Bankruptcy and it can only be filed if your property value is less than the balance owed on your first mortgage – which has to be less than one million dollars. You must arrange and pay for an appraisal of your property.
For example, if your home is worth $500,000 and your first mortgage payoff balance is $525,000, you have no equity. If you have a second mortgage loan balance of $50,000, this second loan is a wholly unsecured mortgage and you can strip the lien in a Chapter 13 case. The lien now becomes an unsecured debt just like a credit card debt which can be wiped out after a period of time. If, however, the home is worth $530,000, you cannot strip off the second lien because it is merely undersecured, not wholly unsecured.
Chapter 13 lien stripping is ideal for the large pool of borrowers who took out 80/20 loans or HELOCs where the 2nd lien is completely underwater. If such a lien is stripped, it can be treated as an unsecured debt in the Chapter 13 payment plan and paid a fraction over 5 years. (The actual percentage paid depends on several factors, including the value of the homeowner’s assets and disposable income.)
Homeowners don’t have to fall behind on payments to be eligible for lien stripping. They must prove to the Court that they have steady income and can make the first mortgage payments. In addition, they must make every plan payment for 3 to 5 years or else everything goes back to the way it was before the filing of the Chapter 13 case.
In part because a recent Congressional proposal to “cram down” first mortgages to their fair value failed to win enough support, bankruptcy judges are now looking more favorably on practices such as lien stripping – especially if it permits a debtor to keep their home. One of the only downsides is that a Chapter 13 filing appears on your credit history but that is far outweighed by the positive aspects of keeping one’s home and helping to stem the national tide of foreclosures.
Jeffrey M. Binder, Esq. is an attorney in White Plains, NY who practices bankruptcy law. He can be reached at (914) 946-3191.