After the real estate collapse in 2008, many homeowners found themselves deep in debt. The terms “underwater” and “bankruptcy” became commonplace, as loan payments became too high to bear and the prices of homes plummeted.
As more and more individuals defaulted on their loans, Chapter 13 bankruptcy became a popular option. It includes a key provision that allows for lien stripping, which can relieve you of the burden of second or third mortgages on an underwater property.
In fact, for those currently facing this seemingly insurmountable debt burden, lien stripping can mean the difference between repossession and repose.
What Is Lien Stripping?
Lien stripping is a process that forgives certain debt that is normally ineligible to be written off. Only attainable through the filing of Chapter 13 bankruptcy, lien stripping is typically for people with unsecured debts, such as those who have taken out mortgages for more than their home is worth.
When a property value decreases and the amount owed on a primary mortgage is more than what the property is worth, any additional mortgages (called junior liens) become unsecured debt. Unsecured debt means that it is no longer collateralized by your home and is eligible to be discharged by a bankruptcy judge.
Benefits Of Lien Stripping
While filing for bankruptcy does affect your credit, it may not be as bad as you think. We shared some information about bankruptcy misconceptions here, but in essence, while the bankruptcy stays on your credit report for a period of time, you can still get credit and begin to build your score relatively quickly.
Chapter 13 bankruptcy is preferable for salvaging long term credit. Lien stripping ensures that your home will not be foreclosed upon, which is a tremendous benefit when it comes to credit.
In addition to greater financial peace of mind, Chapter 13 bankruptcy and lien stripping allows you to continue to live in your home as long as you continue to pay the primary mortgage. You can eliminate the stress of being forced to relocate and the overwhelming feeling of loss that can accompany foreclosure.
Plus, if or when you decide to sell, any junior liens that may have been lien stripped from the property will not show up in the required title search.
It is important to note, however, that lien stripping is not a magic wand that dissolves all of your problems. Lien stripping can be most effectively used as a part of a relief plan determined by an assessment of your overall situation, a task best undertaken by an experienced and knowledgeable attorney.
Why Hire An Attorney For Lien Stripping?
Hiring an attorney in bankruptcy cases is crucial for a number of reasons.
First and foremost, a bankruptcy attorney will be able to examine your finances and determine what kind of bankruptcy filing is your best course of action.
Secondly, there are a number of legal procedures that must be fulfilled in order for Chapter 13 to be filed successfully, and for lien stripping to occur in a way that benefits you. A bankruptcy attorney will know the ins and outs of the practice, and may be able to find an avenue that allows for the dismissal of more debt. Unless you are versed in bankruptcy law, hiring an attorney to look through your case can potentially save you from a “one-size-fits-all” payment plan, rather than one that fits your specific needs.
Lien stripping doesn’t just involve bankruptcy laws. It also brings into play real estate and property law, which come with their own sets of challenges. An attorney can make sure that you have all the materials you need in place before filing, from an accurate estimate of your home’s worth to an official appraisal with the bankruptcy court
Hiring an attorney can also prove beneficial when deciphering home loan and bank contracts. By eliminating the risk of surprise requirements and fines, as well as ensuring that the filing is done correctly, an attorney can make sure that the process results in the best possible outcome for your situation.
Filing for bankruptcy is often scary and stressful with a plethora of paperwork and requirements to fulfill. But adding an attorney who is knowledgeable and well versed in these procedures allows you the peace of mind that your financial situation is being handled skillfully and efficiently.
If you or someone you know is underwater on their home in the state of New Jersey, let us help. We are versed in both bankruptcy and real estate law, and dedicated to working for the best possible outcome for you.