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Lien Stripping in Chapter 13 Bankruptcy

Lien Stripping in Chapter 13 BankruptcyWe Have Stripped Off Dozens of Second Mortgages Helping People to Avoid Foreclosure and Keep Their Homes

Lien stripping in Chapter 13 bankruptcy is possible, but it depends on the value of your home relative to your first mortgage. Let’s start with some history. Few areas of the country were hit harder by the home foreclosure crisis that began in 2008 than San Jose and the greater San Francisco Bay Area. As bankruptcy attorneys, we fought at the forefront of the mortgage crisis, helping dozens of clients avoid foreclosure. We were confronted every day with the terrible cost of the irresponsible mortgage lending engaged in before the Great Recession by banks and mortgage brokers pushing subprime mortgage loans.

Jumbo loans, variable rate mortgages, second mortgages, and above all, Home Equity Lines of Credit (HELOCs) were so pushed by banks and their mortgage brokers that the majority of our bankruptcy clients who owned a home between 2008-2012 were severely “underwater” in their mortgages. Often the value of our clients’ homes became so depressed that second, or junior liens such as home equity lines were completely unsecured by any equity in the property. Many homes in the Bay Area remain underwater today.

Lien Stripping in Chapter 13 Bankruptcy

One powerful tool offered by Chapter 13 is the possibility of lien stripping, or removing second mortgages and home equity lines from a home. Chapter 13 bankruptcy allows such second mortgage loans to be stripped from a debtor’s principal residence if that second lien is found by the Court to have become unsecured. This procedure is one of the most powerful forms of debt relief available in Chapter 13 bankruptcy.

To “strip” off a secured second mortgage, deed of trust, or other junior lien from a property and convert such debt into unsecured debt, the Chapter 13 attorney must file a special motion with the Bankruptcy Court at the outset of the Chapter 13 case. The purpose of this motion is to formally establish the value of the debtor’s home relative to the principle balance of the first mortgage on the home at the time of filing the Chapter 13 case. If the debtor can prove that the home is worth less than the amount owed on the first mortgage or deed of trust, then the Bankruptcy Court can rule that the second mortgage, HELOC, or other junior lien is unsecured debt.

This second loan is then lumped in with the debtor’s other unsecured debts, and treated the same as other general unsecured debts in the Chapter 13 Plan. At the conclusion of the Chapter 13 plan, any remaining balance is discharged. The Bankruptcy Court will then issue a judgment that voids the second deed of trust. The Chapter 13 debtor can then emerge from bankruptcy owning his or her home free and clear of the second, stripped mortgage loan.
The Bankruptcy Court’s judgment voiding the lien can then be recorded in the county recorder’s property records just like a deed or a deed of trust.

While fewer of our clients today own homes so depressed in value that a second mortgage is wholly unsecured, some homeowners in the Bay Area can still take advantage of this powerful tool in Chapter 13. And if home values decline again in the future—and they likely will as boom and bust cycles seem to afflict the Bay Area especially hard—our bankruptcy attorneys will be ready to help our Chapter 13 clients strip off second liens from their homes.

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Jon Brooks was wonderful to work with on filing for bankruptcy. He is professional, polite, and very detailed. I'm so grateful I'm debt free... Read more

Michelle D., San Jose

I just wanted to take this time to say that I had the privilege of being represented by my bankruptcy attorney Jon. At first I was really te... Read more

Frank S., San Jose

Jon focused on the key issues quickly, and knew critical answers I could not find elsewhere – even from other attorneys! I highly recommen... Read more

C.C., San Jose

If you are reading this, chances are you haven’t been on a ‘winning streak’ in your life lately. When my wife and I came in to see Jon... Read more

Keith A., San Jose

Jon provided me with the pros and cons of what type of bankruptcy to file which I understood very well as they were presented to me and my w... Read more

Tony G., Fremont

Jon Brooks demonstrated confidence, compassion, and professional integrity while handling my challenging bankruptcy case. He skillfully disc... Read more

Lisa C., Palo Alto

I can't thank Jon enough for helping us through the most difficult time in our life. Coming to the conclusion that I had to file bankruptcy ... Read more

J.S., San Jose

Choosing Jon to represent me in my bankruptcy case was the best decision I have ever made! He is extremely knowledgeable and explained every... Read more

Sara L., Campbell

Jon Brooks helped us get a fresh start without making us feel ashamed for our bankruptcy. He and his staff were professional to an ultimate ... Read more

Y. Carter and D. Carter, San Jose

I am a young single mother that went through a very difficult time and knew bankruptcy was the smartest option for me at the time. Mr. Brook... Read more

S.M., San Jose

We were saved by the office of Jon Brooks when our country was in the Great Recession. They solved our second mortgage and debt problems pow... Read more

Sam S., San Jose

Jon Brooks and his wonderful team helped me with my bankruptcy case and gave me back my peace of mind. My initial (free) consultation with M... Read more

Raquel P., San Jose

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