Under Bankruptcy law, certain liens to real property can be removed under some circumstances. This process is also known as “Lienstripping.” To lienstrip under bankruptcy, the individual filing (also known as the debtor) must establish several factors. Most people filing for bankruptcy want to eliminate nonjudicial liens from their properties. A nonjudicial lien is typically a mortgage loan (usually the second mortgage or home equity line of credit). Sometimes people have liens from judgments (usually credit cards) that they want to remove.
In the first case of a nonjudicial lien, the first step is to file the right Chapter of Bankruptcy. In Chapter 7, nonjudicial liens cannot be eliminated. The debtor must file either a Chapter 11 or 13 (or 12 if the debtor is a family farmer or fisherman). Next, and most key to lienstripping is to determine the value of the property. A lien cannot be stripped off a property unless the lienholder effectively has no interest in the property. This means that the value of the first loan against the property must be greater than the value of the property (i.e. if the property is sold, the second lienholder would receive nothing from the sale).
In the case of a judgment lien, a Chapter 7 case is sufficient to remove the debt from the property. The key in this case is to ensure that there is no equity in the property, after the mortgages and any exemptions, to pay off the secured creditor.
In both nonjudicial and judgment liens, motions must be filed with the Bankruptcy Court. In general, a hearing on the motion may not be necessary, although creditors can object to the value placed on the property or other issues they perceive with such a motion.
Should you have any questions on lienstripping please contact David Henshaw today.