My partner, John Greifendorff and I appeared yesterday on Real Estate Radio with Ron Siegel again and briefly discussed the issue of lien stripping. The legal term used is ‘lien avoidance,’ and your lawyer’s work is completed through either a motion or adversary complaint filed with the court in your bankruptcy case. Effectively upon order of the court, the lien of your second mortgage, or junior lien, is removed from your property, thus making it an unsecured debt to you. That debt is then placed in your Chapter 13 Plan. At the end of your bankruptcy case, what ever balance remains is discharged and you are no longer legally obligated to pay on that debt.
Many courts hold that the debtor must complete their bankruptcy plan for the lien avoidance to be effective. The bloggers over at The Bankruptcy Law Network recently posted that such liens, at least in the Southern District of California may become effective prior to the discharge of debts in the bankruptcy case; article. In either case, you could potentially avoid a significant amount of debt with this valuable bankruptcy tool.
Here’s how you know if this tool is right for you. If you owe more on your first mortgage than the fair market value of your home, you can avoid any junior or second mortgage. You will be required to have an appraisal of your home in support of your motion. Consult with your local bankruptcy lawyer to create your personal path to financial freedom from debt.