Lien stripping is a powerful tool. It allows you to remove junior liens on your home (the second or third mortgage, HELOCs and home equity loans) if they are not secured by the value of the value of the home. You can use lien stripping in Chapter 13 bankruptcy in Alabama, as you can in other states. However, unlike most states, some bankruptcy courts in Alabama also allow you to use lien stripping in Chapter 7 based on a few recent cases from the Eleventh Circuit Court of Appeals. A knowledgeable Montgomery bankruptcy attorney can evaluate whether lien stripping can help dig you out of debt.
For many homeowners, their hefty mortgage payments are a major reason they find themselves in debt. Fluctuating values of the property over the years can leave a homeowner with a home worth significantly less than what it cost to buy it. Lien stripping is intended to address the hardships of those whose homes are not worth the full amount of the mortgages securing them.
Courts in Alabama look at the objective value of a home in determining its worth. You will need to use your property tax bill or get an independent appraisal to prove your home's value and assess whether lien stripping can be used. You want the appraiser to state the lowest value possible, but the bankruptcy administrator and creditors are hoping for a higher valuation of the home. Typically, a first lien is at least partially secured by a house and therefore, it cannot be stripped.
A junior lien is not completely secured if the equity in the home doesn't cover a portion of the amount of the lien. If your home is worth $350,000, your first mortgage is $400,000 and your second mortgage is $25,000, the first mortgage secures the entire property and the second mortgage is wholly unsecured. When it is not secured, a junior lien is treated as equivalent to credit cards or medical bills—debts that are typically wiped out if you make all the payments in your approved debt repayment plan. The second mortgage in the example above can be stripped so that you do not owe anything on that mortgage by the end of the bankruptcy process.
In a different example, if your home is worth $350,000, your first mortgage is worth $250,000 and your second mortgage is $100,000, both mortgages are fully secured by the value of the property. Therefore you cannot strip the second mortgage during bankruptcy. If any part of a junior mortgage is secured, lien stripping is not available for that mortgage.
Once the lien is converted to unsecured debt in a Chapter 13 proceeding, it has less priority than other debts that need to be paid back and reduces the overall amount that you will need to pay back. If your local bankruptcy court treats the recent Eleventh Circuit cases as binding rather than simply persuasive authority, lien stripping allows you to remove the junior liens that are not secured, leaving you with no obligation to pay those mortgages back after you receive a discharge.Alabama Bankruptcy Attorney Can Help You Reduce or Get Rid of Debt
Dealing with debt is hard. But there are a lot of tools that bankruptcy offers to help you get out of crippling debt. An experienced Alabama bankruptcy attorney can look at your particular situation, advise you if bankruptcy is a good solution for you, and may be able to give you other long-term solutions as well. Grainger Legal Services represents clients from our offices located in Montgomery, Prattville, and Troy, Alabama. Call us at (334) 260-0500 or contact us online to schedule a consultation.