The housing bust hit Nevada particularly hard, and Las Vegas bankruptcies due to underwater homes are not uncommon. Many people wonder about the benefits and drawbacks of filing in Chapter 7 versus Chapter 13. One important distinction between the two is “lien-stripping. What is this exactly?
First, a lien is a security interest in a piece of property by a lender to enforce payment by the borrower. For instance, when someone obtains a mortgage, the lender places a lien on the house in exchange for the loan. Once the loan is paid off, the lender releases the lien on the house. In other words, the lien is the component of the mortgage deal that gives the lender the legal power to foreclose on a house when non-payment occurs.
Thus, lien-stripping refers to a legal order during bankruptcy that voids the lien on a house held by a lender. Obviously, stripping a lien is a serious boon to bankruptcy debtors, but here are a few things one needs to know about it because it’s not an option always available to those filing Las Vegas bankruptcies.
1. Lien-stripping does not occur in every chapter. The only liens that can be stripped in every chapter are judgment liens on assets that are can be exempted, if they’re not already.
2. In Chapter 13, tax liens and statutory liens can be stripped off an asset if that asset has no value, but only after senior lien holders have been satisfied.
3. Most importantly, in Chapter 13, underwater second (and subsequent) mortgages can both be discharged like consumer debt and the lien stripped, though discharge occurs after completion of the three- to five-year payment plan. The difficulty is in assessing the home’s value and ensuring that the full value would go to the superior mortgagee in the event of a foreclosure.
4. In Chapter 7, lien-stripping isn’t available for underwater second mortgages. If you manage to discharge an unsecured second mortgage, the lien remains. This can be problematic, but if the homeowner is giving up on the property anyway, the underwater second mortgagee is more likely to sue on the mortgage note rather than foreclose on the property.
Stripping an underwater mortgage lien in a Chapter 13 bankruptcy is a strong benefit of choosing that chapter, even if discharging the second mortgage isn’t possible due to other factors. Knowing these subtleties in the bankruptcy code is a compelling reason to hire an experienced Las Vegas bankruptcy lawyer.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 702-903-1459 to set up your free consultation.