The ability to strip valueless secured liens on residences in Chapter 13 bankruptcy has been recognized and re-affirmed by the Federal Fourth Circuit Court of Appeals. In a recent case, In *Re: Alvarez (12–1156) which was an appeal of a decision from a Maryland bankruptcy court lien stripping for married couples was reviewed. The federal appeals court recognized that “the bankruptcy court has the authority to strip off a completely valueless lien on a debtor’s primary residence, thereby eliminating a lien holder’s In Rem rights against the collateral property”
This case reaffirmed the recognition of the process granted by Congress that we at GWO, LLC have been successfully using for many years for our clients. On our website we have created an easy to use lien strip calculator to determine if your home is eligible to take advantage of this process. The Alvarez case clarified that in order for married couples to take advantage of this significant right to strip liens off of their homes, both the husband and wife must join in the chapter 13 bankruptcy proceeding. This is generally not a problem for our married clients as the benefits of Chapter 13 will usually out way any disadvantages. Unmarried owners of property already have been able to use this valuable mortgage modification tool.
Many of our clients have been struggling for quite some time attempting to achieve mortgage modifications through direct negotiations with their lenders. These negotiations can be long, tedious, and unproductive. Many times these mortgage modification negotiations end with frustration, a larger arrearage, increased collection costs and our clients facing foreclosure.
The success rate of mortgage modification is dismal. The process of using chapter 13 to strip liens is much more beneficial and advantageous to the overall financial reorganization of our clients. The chapter 13 Bankruptcy Plan not only results in the elimination of valueless liens it also resolves all payment defaults and debt obligations in a manageable payment plan.
Let’s answer the question; what is the lien strip process? The process we utilize is called lien avoidance or a lien strip. Many of our clients have seen the value of their home drop from its previous peak value during the real estate boom. If second
mortgages and lines of credit were incurred during the real estate boom and now the value of your home has dropped since you incurred the second lien to below what was owed on your first mortgage then the lien is now valueless. If there is no equity remaining in the property to support the second or subsequent lien then the court will allow the strip off of that secured lien claim and it will be treated as if it is unsecured during the chapter 13 plan. Once the chapter 13 plan is completed the debtors receive an Order of Discharge and they are no longer obligated to pay unsecured claims including those stripped off valueless liens.
When a chapter 13 plan is formulated we determine with our clients what each can afford to comfortably pay to resolve their debts. The chapter 13 plan is a court supervised debt management plan proposed for a 3 to 5 year period. The difference between a chapter 13 plan and a debt management plan outside of bankruptcy is that while in Bankruptcy you may not be required to pay back all of your unsecured debts. In this plan, the priority debts, like taxes, child support, fines and penalties, and secured arrearages for house and car payments, are allowed to be caught up over time. After those critical household payments are paid then if there are funds remaining for unsecured obligations than those are paid from those remaining funds. How little or how much is paid is determined by each specific case. Payment to the unsecured class of claims can sometimes be paid less than ten cents on the dollar of the original claim. This results in a significant savings for our clients
A married couple with two children who due to an illness and interruption in employment sought our advice:
They had a house with a market value of $ 500,000.00
A first mortgage lien balance of $510,000.00 with mortgage arrears of $6,000.00
A second mortgage lien balance of $65,000.00 with mortgage arrears of $1,800.00
Unpaid income taxes in the amount of $3,200.00, and
Credit cards and medical bills totaling $30,000.00
In our example, under a typical chapter 13 plan our clients were struggling to pay taxes, medical bills and credit cards at the same time, due to an illness, had fallen behind on their mortgages and necessary monthly expenses. The decision to use Chapter 13 helped them to reorganize their finances which allowed them to get back on solid financial footing.
We recommended a 60 month Chapter 13 Plan. The second mortgage with a balance of $65,000.00 and a monthly payment of $312.00 was stripped and eliminated from the budget. The $30,000.00 of credit card debts and medical debts as unsecured claims were curtailed. When we added the stripped off $65,000.00 second mortgage to the unsecured debts we ended up with an unsecured class totaling $95,000.00 The taxes owed and the missed house payments were caught up in the Plan. The manageable Plan payment of $270.00 per month (less than the original second mortgage payment alone) cured the financial stress on this family. The stripped off second mortgage and unsecured debts were discharged after the completion of the Plan.
Once the chapter 13 plan is completed our clients have found that they put their financial house in order; the taxes; the first mortgage arrears are all caught up and the second mortgage has been stripped off and satisfied. The unsecured credit debts have been eliminated.
Our clients in our example now have an improved payment history with the first mortgage company, they have retained and maintained their auto payments, and they have reduced their housing costs by eliminating the second mortgage payment and have eliminated their credit card payments and medical bills.
What happened to the debt structure on their home? After 5 years, in a chapter 13 plan they only have one mortgage on a home that hopefully has begun to recover its previous value. They have reduced the balance on the first mortgage and now the only mortgage lien on their home, hopefully increasing the equity in the property.
In other words, the finances of our clients have been stabilized, controlled and improved, and the dependence on the expensive unsecured credit debt has been curtailed. Our clients emerge from chapter 13 with a much improved financial outlook.
We take pride in having advised and guided our clients through difficult financial times. Please give us a call so that we can analyze your situation to see how Chapter 13 can work for you.
*Each case is different and past record is no assurance that the lawyer will be successful in reaching a favorable result in any future case.
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