Lien Stripping Process Available to Debtors Facing Bankruptcy
Ohio homeowners know that today’s housing market has diminished the equity in their most important investment. As a result of the housing crisis, many Ohio homeowners are “under water” on their homes, meaning they owe more on their home than it’s worth. Still more people with second mortgages or home equity lines of credit have such severe negative equity that their homes are worth less than the amount owed on their primary mortgages.
If a homeowner files for a Chapter 13 bankruptcy, money owed on a junior mortgage can be treated as unsecured debt. In that situation, a mortgage lender is treated the same as other unsecured creditors. This means when the payment plan set up under the bankruptcy is completed, the junior mortgage be removed from the property. This normally results in a substantial savings as a debtor can pay the junior mortgage at pennies on the dollar without interest.
The lien stripping process is not new, but with declining home values over the past few years it has become more common. At first glance, it appears greatly beneficial to homeowners who are experiencing a diminishing home value.
However, there are important considerations to keep in mind. It is essential that the debtor understand that the lien is only discharged if the Chapter 13 bankruptcy plan is completed. The lien is not automatically discharged once the bankruptcy is filed. If the debtor fails to follow through on the terms of the bankruptcy plan or it becomes converted to a Chapter 7 bankruptcy, the lien is fully reinstated.
Lien stripping is not limited to junior mortgages in Chapter 13. Other types of mortgages which strap homeowners can also be bifurcated and removed. For example, small business owners who have pledged their home and business assets as collateral for a loan can bifurcate or “cram down” the loan to the value it attaches to and treat the balance of the loan as unsecured. And, certain short term loans which, by their terms, are payable during the life of the Chapter 13 plan can also be crammed down to value.
Judgment Lien Stripping
Just like consensual junior mortgages can be stripped, avoided and removed from a homeowners’ property, so too can certificate of judgment liens. These liens, often called “CJ liens” can attach to a home and prevent a homeowner from selling or refinancing it without paying off the judgment that formed the basis for the lien. More troubling is that many Ohio homeowners do not even know these types of liens are attached to their property because the judgment creditors are not required to give notice of their attachment. Bankruptcy can help in removing these liens even if a homeowner has equity in their home. And, judgment liens can be stripped in Chapter 7, Chapter 13, and Chapter 11 proceedings.
Even Primary Mortgages Can Be Stripped
Generally, a primary mortgage on a person’s home cannot be avoided, stripped or bifurcated without full payment under the terms of the note. However, even that long established rule has its exceptions. In cases where a primary mortgage has a defect in its execution, its acknowledgment, or in its wording, Ohio law can allow a homeowner, in bankruptcy, to strip or remove a primary mortgage from his or her home. The circumstances under which this can occur are somewhat rare, but the frequency of errors in the drafting, execution, and acknowledgment of primary mortgages in Ohio has increased with the high volume of borrowing that occurred over the past ten years and the loose standards that accompanied the trend.
An experienced Ohio bankruptcy attorney can help explain the different types of lien stripping and the options and consequences to the homeowner. With housing prices at lower levels in Ohio, there may not be a better time for Ohio homeowners with negative equity, unaffordable judgment liens, or delinquent mortgages to explore their options.