Lien stripping can benefit you as it removes unsecured claims from your assets.
Under Chapter 13, liens can be stripped down to the value of the collateral-unsecured claims can be removed off of your assets. A lien is unsecured if there is not enough equity in the asset after deducting senior liens from the current market value of the asset. If the claim exceeds the value of the asset, the excess portion of the claim is unsecured and can be stripped.
Example 1: Liens Secured by Vehicles
- Your car is worth $10,000.
- The lender has a $12,000 claim.
- The lender has a secured claim of $10,000 and an unsecured claim of $2,000,
- Chapter 13 allows unsecured claims to be removed.
- Thus, the $2,000 can be stripped off the car leaving you to only pay for the current value of the car of $10,000.
- You have a property worth $300,000.
- Your first mortgage is $320,000.
- Your second mortgage is $150,000.
- Because lenders are only secured up to the value of the property, the first lender is secured by the home's value
- The second lender has nothing to secure their lien because your property has no value left after the first lender's claim, which makes the second lender an unsecured creditor.
- Chapter 13 allows unsecured claims to be removed as you can remove or "strip" the second mortgage completely.
This is a brief overview as lien stripping is a complicated process that requires proper filing and court approval. You will need the guidance of an attorney to safely navigate through the various legal pitfalls.