Lien Stripping in Chapter 13 Bankruptcy


Our San Jose Chapter 13 Attorneys Have Stripped Dozens of Second Mortgages Helping People to Avoid Foreclosure and Keep Their Homes

Few areas of the country have been hit harder by the home foreclosure crisis than San Jose, California, and the greater San Francisco Bay Area. As bankruptcy attorneys, we are at the forefront of the mortgage crisis. We are confronted every day with the terrible cost of the irresponsible mortgage lending engaged in during the last decade by the banks in their drunken frenzy to extend subprime mortgage loans thereby causing unsustainable appreciation in the housing market. Jumbo loans, second mortgages, and Home Equity Lines of Credit were so pushed by banks and their mortgage brokers that the majority of our bankruptcy clients who own a home today are severely underwater in their mortgages. Worse, many times the value of our clients' homes are so depressed today that such second, or junior liens are now completely unsecured by any equity in the property.

All too commonly, prospective bankruptcy clients come to us having been misinformed by friends or the popular media that such second mortgages and HELOCs are easily stripped from the property in bankruptcy. This is unfortunately not true. However, at least here in the U.S. Bankruptcy Court for the Northern District of California (which includes San Jose), Chapter 13 bankruptcy does allow such second mortgage loans to be stripped from a debtor's principal residence in certain, specific circumstances. This procedure is one of the most powerful forms of debt relief available in Chapter 13 bankruptcy.

Chapter 13 Lien Stripping
To "strip" or convert 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, known variously as a "motion to value property," a "Lam motion," or a "Zimmer" motion (for B.A.P. and 9th Circuit Opinions, respectively) 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 to the Bankruptcy Court's satisfaction that the home is worth LESS than the amount owed on the FIRST mortgage or deed of trust, the Court may 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 paid some percentage through the Chapter 13 payment plan. As we explain in more detail in our articles on Chapter 13 payment plans, Chapter 13 cases generally provide for payment of only a small percentage of what is owed to unsecured creditors. Provided that the Chapter 13 payment plan is completed by the debtor over either 3 or 5 years, the debtor receives a discharge (subject to certain limitations) of the remaining unsecured debt at the end of the payment plan. What this means is that the stripped second mortgage loan can effectively be paid off in 5 years. The Chapter 13 debtor can then emerge from bankruptcy owning his or her home free of the second, stripped mortgage loan.

In summary, for a lien strip to work in Chapter 13 bankruptcy, (1) the debtor must file the motion to value at the outset of the case and obtain an order from the Bankruptcy Court establishing that the second mortgage loan was unsecured at that time, (2) the debtor must complete the Chapter 13 payment plan, thereby paying some portion (sometimes a very small percentage) of the now unsecured second mortgage loan, (3) the loan to be stripped must be secured by the debtor's principal residence, and (4) at the closing of the Chapter 13 case, the bankruptcy attorney must file another motion with the Court to obtain an order voiding the lien or deed of trust formerly held by the second mortgage holder. Additionally, the amount of the second mortgage loan, when lumped into the Chapter 13 plan with the debtor's other unsecured debts, cannot cause the debtor to go over the debt limits applicable to Chapter 13 bankruptcy cases. See our article on Chapter 13 debt limits.

To further discuss lien stripping a second mortgage in Chapter 13 bankruptcy and to schedule a free consultation with an experienced bankruptcy attorney at the Law Offices of Jon Brooks in San Jose, CA, please call us at 408.286.2766. Prior to our appointment, we ask that you download our Personal Bankruptcy Questionnaire, fill it out to the best of your ability, and bring this information with you to your meeting with us.

We are proud to be a Debt Relief Agency as defined by federal law. We help people get out of debt by filing for relief under the Bankruptcy Code.


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