Mortgages, credit lines, lines of equity, or even car loans (financing) are considered secured debts because they are secured on a collateral, the collateral being either your car, or your vehicle. For as long as there is a remaining balance in those loans, the lender holds a lien on the collateral. Eliminating a secured debt through bankruptcy is called lien stripping.

Bankruptcy, Chapter 13 Bankruptcy to be specific, can help you strip a lien by re-classifying a secured lien as unsecured, or partially unsecured.  To learn more about reclassifiying your secured debts in bankruptcy contact Kristy Qiu, Esq., a Fort Lauderdale bankruptcy lawyer.

For an investment property:

Although a secured lien is attached to your collateral, it is possible to bifurcate a lien and separate it into a secured portion, and an unsecured portion. The portion of the lien that remains secured is the portion that is equal to the current market value of the real property.

The unsecured portion is the portion that exceed the fair market value, which can be eliminated in a Chapter 13 bankruptcy. This is called cramming. In order for cramming to work, however, your investment property must be rented, and the amount of monthly rent that you receive, would have to be almost as much as the monthly payment that you would have to make to cram the property.

Besides cramming, if there is any second mortgage or credit line on your investment property, and the current market value of the property is lower than the balance for the first mortgage, the second mortgage or credit line can be eliminated completely.

For example, Sam owns an investment property, the balance of the first mortgage is $200,000, the second mortgage is $100,000 and the credit line is $50,000. In a Chapter 13 bankruptcy, if the fair market value of Sam’s property is below $200,000, let’s say $120,000, then both the second mortgage of $100,000 and the credit line of $50,000 can be stripped completely.

The first mortgage of $200,000, can be bifurcated, or crammed into a secured portion, which equals to the fair market value of $120,000, and an unsecured portion, 200,000 – 120,000 = $80,000, which can be eliminated. The regular amortization interest is 5.25%, which brings the total amount to $136,699.08, or a monthly payment of $2,278.32. For the cramming to be approved by the court, however, Sam has to be receiving at least $2,100 in rent before the cramming is attempted.

For a homestead or primary residence:

Just as an investment property, a second, third mortgage, or a credit line can be eliminated in a Chapter 13 bankruptcy for a primary residence if the balance of the first mortgage exceeds the fair market value of the property. The first mortgage, however, CANNOT be bifurcated. In other words, cramming of a first mortgage CANNOT be done for a debtor’s primary residence.  Only second, third mortgages, or credit lines can be stripped, provided that the balance of the more senior lien is more than the fair market value of the primary residence.

For example, Amy’s homestead property or primary residence has a first mortgage of $250,000, a second mortgage of $100,000, and a credit line of $30,000. If the fair market value of Amy’s primary residence is below $250,000, both the second mortgage and the credit line can be stripped. If Amy’s primary residence is worth more than $250,000, but less than the sum of the first mortgage and the second mortgage, $350,000, then only the credit line of $30,000 can be stripped, the second mortgage cannot be eliminated.

In some jurisdictions, lien stripping is allowed in a Chapter 7 bankruptcy. In the Southern District of Florida, however, many judges have already voiced the concern that such lien stripping is in conflict with the Bankruptcy Code, thus have not allowed it.

Contact Kristy Qiu, a knowledgeable bankruptcy attorney with offices in Miami, Fort Lauderdale, and Woodbridge, New Jersey to learn more about lien stripping.