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Lien Stripping: What it is and How it Can Help You Protect Your Home

Distressed couple

In many situations where a homeowner is dealing with what feels like unmanageable debt, it is not just a single mortgage or equity loan connected with that property that is overwhelming the owner, but rather multiple loans where the lenders hold liens on the property. A borrower may be dealing with multiple collection efforts from various lenders, who may be making contradictory demands and sending the borrower into a state of anxiety of how to deal with all these different lenders and their demands.

The process of lien stripping in bankruptcy court is a complicated one, but in certain cases it can result in your being able to convert a loan secured by your house into an unsecured loan, providing you with an increased ability to protect your home from creditors. The Supreme Court of the United States has held that lien stripping is available in a Chapter 13 bankruptcy where the borrower has a senior mortgage or home equity loan that is larger than the appraised value of the home. What this means is that, if a homeowner had a primary residence that was currently valued at $250,000, and had a senior mortgage loan with a balance of $275,000 (or, in other words, $25,000 more than the current appraised value of the home), and other junior loans where the lenders held liens attached to the same property, the debtor can successfully petition for the bankruptcy court to modify the junior loans so that they become unsecured loans, meaning the junior lenders will no longer have liens on the house and are thus unable to pursue a foreclosure action on the property. This does not mean that the junior loans are necessarily extinguished, and the borrower may still be required to pay the money due on those loans over time, but the key aspect of the lien stripping process is that the junior lender who has been subject to lien stripping will no longer be able to target the borrower’s home.

Previously, some courts allowed for lenders to pursue lien stripping through a Chapter 7 proceeding, but the Supreme Court recently held in the case of Bank of America v. Caulkett that lien stripping was not available in a Chapter 7 proceeding. The pro-borrower tool of lien stripping, however, does remain available in a Chapter 13 proceeding following this ruling. Lien stripping remains a potentially complicated process, requiring the appraisal of the home prior to the bankruptcy proceeding allowing for lien stripping, but working with an experienced bankruptcy law professional can help guide you through this process.

If you are finding it difficult to keep up with one or more loans connected with your home, contact a knowledgeable Kentucky bankruptcy and consumer law attorney at Lanna Kilgore PLLC.

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