Thanksgiving Week: Giving Thanks for Special Home-Saving Tools-Part 2
Save your home by “avoiding” judgment liens and “stripping” your second (or third) mortgage off your title.
Yes, last week was Thanksgiving, but while you’re still finishing up the last of the turkey leftovers here are a couple more things to be thankful for about bankruptcy when it comes to your home. In our last blog, we showed how bankruptcy—Chapter 13 especially—can be tremendously effective with unpaid property taxes and recorded income tax liens. Today we show how, in the right circumstances, to:
- get rid of judgment liens that are on your home’s title, and
- save hundreds dollars a month and likely tens of thousands of dollars over time by “stripping” a second or third mortgage from your home.
Before getting into the details, be aware just how extraordinary these two tools are. That’s because they enable you to break one of the main creditor-protection principles in the law–that a secured creditor is entitled to its property rights in the collateral or other security, regardless of the debtor’s ability to “discharge” (legally write off) the debt itself. For example, with a vehicle loan, you can discharge the debt by filing bankruptcy but your lender retains its lien on your vehicle, requiring you to either pay the debt so that you can keep the vehicle or to surrender the vehicle to the lender. We’ll show you how these two tools break creditors’ liens on your home.
“Avoiding” Judgment Liens
The “avoidance” of a judgment lien on your home erases that lien, which a creditor got by suing you on a debt and getting a judgment against you. That judgment is then recorded against the title to your home. That makes the debt thereafter secured by whatever available equity you have in your home. The creditor in effect earned a property right against your home—its potential right to foreclose on your home to make you pay its debt—by taking the legal step it did. But by filing bankruptcy you can, under the right circumstances, erase that judgment lien and the property right that comes with it. That’s a powerful benefit of bankruptcy.
So what are the right circumstances in which a judgment lien can be gotten rid of forever?
- The judgment lien must have attached to real estate that is your “homestead”—property for which you are entitled to a homestead exemption.
- That lien must be a “judicial lien,” “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding,” according to the Bankruptcy Code.
- This lien can’t be for child or spousal support, or for a mortgage foreclosure.
- The judgment lien at issue must “impair” the homestead exemption. That means in effect that it eats into the equity protected by the applicable homestead exemption.
For example, assume you own a $225,000 home that qualifies as your homestead, you owe $200,000 on your mortgage, and so have equity of $25,000. But a creditor has a judgment against you for $10,000, which is secured by a lien on your home which eats into the equity. But assuming also that you are entitled to a $50,000 homestead exemption, the judgment lien is “impairing” the homestead exemption—the lien is eating into equity that is protected by the homestead exemption. So by filing bankruptcy this judgment lien can be “avoided,” or gotten rid of forever.
Second (or Third) Mortgage “Strip”
If you have a second (or third) mortgage, and your home is worth no more than the balance on your first mortgage, that second (or third) mortgage may be able to be stripped off your home title. This is even more extraordinary than the judgment lien avoidance just discussed above, because here we’re talking about erasing a lien that you intentionally signed on for (and didn’t have forced upon you and your home’s title like a judgment lien). Here’s how mortgage lien stripping works:
- It can only be done in a Chapter 13 case.
- You can’t affect the lien on your first mortgage, regardless if your home is worth less than that first mortgage.
- Lien stripping only works with mortgages or trust deeds or equity lines of credit that you signed onto voluntarily. So it does not apply to many other kinds of liens that could attach to your home—income tax liens, judgment liens, child and spousal support liens, contractors’ liens, utility liens, and homeowner association liens.
- Your home must be worth no more than the balance on your first mortgage.
- This lien stripping does not happen automatically in a Chapter 13 case, but is a procedure your attorney has to affirmatively address.
- You may have to pay a portion of the stripped second mortgage during your three-to-five-year Chapter 13 case. The debt is treated as a “general unsecured” one, and so shares pro rata in whatever funds you are required to pay to your pool of unsecured creditors.
- Because you do not get a discharge of your debts in a Chapter 13 case until completing it successfully, your lien strip will not work unless you finish your case.
In most situations lien stripping does not increase the amount you need to pay during your Chapter 13 case because the same amount just gets distributed differently among your creditors. Then at the end of your case, you will owe nothing on your stripped mortgage and it will be removed from your title. You pay hundreds of dollars less per month, and tens of thousands less over the life of your second mortgage.