The bankruptcy alphabet is filled with twists and turns. We’ve gone through some unusual letters so far, but few are as important or as misunderstood as the humble lien.
A lien is a security interest – something a creditor puts onto property to make sure you pay back the debt. A mortgage is a lien that remains until the debt is paid in full. When you take out a car loan, the finance company files a lien with the state Department of Motor Vehicles.
In other words, this is what puts the teeth in the mortgage or car loan. Without the threat of foreclosure or repossession, who would ever pay these debts?
But what does it mean when you’re involved in a bankruptcy?
The Lien And The Bankruptcy
In a Chapter 7 bankruptcy, you’re looking for a discharge of your debts. Though you won’t be personally responsible for the underlying debt after a Chapter 7, the lender will still have the ability to enforce the lien. That means the mortgage company won’t be able to come after you for any deficiency afterwards, but it can still foreclose if you don’t pay the note.
This can be a handy planning tool for those who go through a Chapter 7, take no action to reaffirm a car loan, and suffer a change in circumstances after the case is completed. The car goes back to the lender, you move on with your life without worrying about paying the unpaid balance.
Lien Stripping In Bankruptcy
Let’s say you’ve got a lien against your personal property. The property is worth $6,000 but you’ve got a $10,000 lien against it. If you go into a Chapter 13 bankruptcy, you can “strip the lien.” That means you can get a court to order that the $4,000 worth of debt that exceeds the value of the property be treated as a regular unsecured debt.
Come out of bankruptcy and you only have to worry about a secured debt of $6,000. Ta dah!
The Unfortunate Limit On Home Stripping
Get your head out of the gutter – you can do whatever you’d like at home, and the bankruptcy court doesn’t care. But if you try to strip a first mortgage on your primary residence in a Chapter 13, you’re out of luck.
Don’t like it? Neither do I. Call Congress and make a big deal out of it – the more voices we’ve got, the better our chances of getting the rules changed.
Stripping Your Car
When I was a kid, my parents woke up one morning to a phone call from the police. It seems someone had taken the brand-new car out for a spin and left it miles away, on blocks and totally stripped.
If this had been a bankruptcy related thing, the car wouldn’t have been stripped. In a Chapter 13 you can reduce the car loan lien to whatever the car’s currently worth.
There’s a limit to this, though – if the car was purchased within 910 days of filing your bankruptcy case then you can’t strip the lien on the car.
Taxes And Judgment Liens
Tax liens and judgments can be stripped off in bankruptcy cases. Judgments can be stripped in Chapter 7 and Chapter 13 cases, whereas tax liens can be stripped in Chapter 13. Tax liens can be stripped in Chapter 7 only if it is dischargeable.
Image credit: Leo Reynolds
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