What Happens to Liens in Chapter 13?
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What happens to Liens in Chapter 13? Chang and Diamond, APC, take us through the entire process in this guide. Call us today for any assistance.
The Lien and Chapter 13: How Do They Relate?
If you missed payments and are facing foreclosure, repossession, or wage garnishment, you may wonder how liens are handled in Chapter 13 bankruptcy. In Chapter 13 bankruptcy, a debtor can reorganize their debts and pay them off in three to five years. However, this is done through a court-approved payment plan.
Liens are legal claims on a debtor’s property or income by creditors to secure repayment of debts. They give creditors the right to sell certain properties (or receive money from the sale of certain properties) if debtors fail to repay the loan. Liens often affect your ability to sell or refinance your assets. They can also reduce your equity and creditworthiness.
Most liens survive Chapter 7 and Chapter 13 bankruptcy, so you will still be obligated to pay certain types of liens. These include child support or taxes (statutory liens), which are also not dischargeable in bankruptcy. Additionally, creditors can file liens on property even when it is not owned, such as a rental property.
What happens to liens in Chapter 13 depends on the type of lien, the type of debt owed, and the property’s value. In general, Chapter 13 can help individuals deal with most liens in the following ways:
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It can stop the foreclosure process.
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It can strip off or remove any junior liens like second mortgages.
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It can cram down the principal balance and interest rate of secured debts like car loans.
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It can avoid or eliminate any judicial liens like judgment liens or tax liens.
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It can protect your income and assets from any non-dischargeable debts
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The type and value of the property
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The amount and priority of the liens
Read on to find out how Chapter 13 bankruptcy impacts liens. For more information, call Chang & Diamond, APC.
Understanding How Chapter 13 Affects Liens
Under federal law, the debtor may modify or eliminate some liens in Chapter 13. This depends on the property type, value, and the amount and priority of liens. This can take the form of either lien avoidance, lien stripping, or cramdown.
Lien Avoidance
Lien avoidance protects the right of an individual debtor to exempt property. Lien avoidance applies when a judgment lien or nonpossessional, nonpurchase money security interests (“NPMSIs”) impair a debtor’s exemption from their property. A lien can be avoided if a bankruptcy exemption is available for part or all of the equity in the asset, and the lien would prevent you from taking advantage of the exemption.
During Chapter 13 proceedings, the debtor may request the court to enter an order declaring satisfaction of the secured claim and releasing the lien. If the court grants the debtor’s request, the lien is discharged, and the debtor is no longer obligated to pay the debt secured by the lien. The creditor will then be able to receive the allowed amount of their debt.
Lien Stripping
The process of lien stripping involves the conversion of a secured debt into an unsecured debt. Whenever a secured lien on a property is stripped off, it becomes an unsecured debt. The property no longer secures this debt, and the lender cannot seize the property to recover the loan balance. Consequently, the debtor is free to pursue bankruptcy protection and discharge the debt.
Essentially, this process eliminates a junior lien that is entirely unsecured by the property’s value. A junior lien has a lower priority than other liens on the same property. The debtor must file a motion with the court and provide evidence that the property is worth enough and the amount of the liens. If the motion is granted, the junior lien is wiped out, and the debtor’s remaining debt is paid in the order in which the liens were recorded.
Cramdown
In cram downs, a portion of the debt is converted from secured to unsecured. The secured debt is crammed down to the property’s value, and the rest becomes unsecured. This process reduces the principal balance and interest rate of secured debt.
Debtors must file a motion with the court. If the court grants the motion, they are able to separate the loan into two parts:
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A secured part equal to the value of the collateral
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An unsecured part. It is equal to the difference between the loan balance and the collateral’s value.
Cram downs are often used to prevent foreclosure by the mortgage lender, as they allow the debt to be restructured in a way that is more manageable for the debtor. It can also be used as a bargaining tool in a negotiation with creditors.
Chapter 7 vs. Chapter 13: What Is the Difference?
As a general rule, Chapter 7 allows people to eliminate their unsecured debt. Chapter 13 allows people to reorganize their debts while paying back some portion. Here are some other differences based on the bankruptcy code:
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Chapter 7 bankruptcy is available to individuals with more debt than they can pay. Chapter 13 bankruptcy filing is for individuals who can pay some of their debt through a payment plan.
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Chapter 7 bankruptcy absolves you of all personal liability for most of your debts. Chapter 13 bankruptcy allows you to reduce them according to a court-approved plan.
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In Chapter 7, you get a bankruptcy discharge within six months after you’ve filed the petition. In Chapter 13 bankruptcy, you get it after paying the full amount, which takes three to five years.
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Limitations
These processes have the following limitations:
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A debtor cannot avoid or strip a voluntary lien they agreed to grant to a creditor holding the lien. This includes a reaffirmation agreement or a post-petition loan.
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A debtor cannot modify their primary mortgage secured by their principal residence.
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A debtor cannot strip or cram down the following:
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Their car loan if they purchased their car within 910 days.
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Personal property loans if they purchased them within a year of filing for bankruptcy.
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A debtor cannot discharge any liens that survive or arise after bankruptcy.
The Types of Liens That Can Be Affected by Chapter 13 Bankruptcy?
The specific types of liens that can be affected by Chapter 13 bankruptcy are:
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Judicial liens: These are liens that result from a bankruptcy court judgment against the debtor. You can avoid a judicial lien in Chapter 13 bankruptcy if it impairs your equity in your property.
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Non-purchase money security interest liens: These are liens that the debtor grants to secure a loan that is not used to buy the property that secures it. Suppose a debtor takes out a home equity or personal loan and uses their home or car as collateral. They have a non-purchase money security interest lien on their property. These liens can also be avoided in Chapter 13 bankruptcy if they impair the debtor’s exemptions in their property.
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Junior liens: These liens have lower priority than other liens on the same property. Suppose a debtor has a first and second mortgage on their home. The second mortgage is a junior lien. These liens can be stripped off in Chapter 13 bankruptcy if they are unsecured by the property’s value.
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Secured debts: These are debts backed by an asset that unsecured creditors can repossess if the debtor defaults on the loan. For example, if a debtor has a car loan, the car is the collateral for the loan. These debts can be crammed down to match the current market value of the collateral.
How Can an Attorney at Chang & Diamond Help You With Liens in Chapter 13?
An attorney at Chang & Diamond, APC, can help you in the following ways:
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Offer legal counsel on matters like Chapter 13 vs. debt consolidation.
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Determine which type of bankruptcy to file.
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Claim exemptions for certain property or assets, such as homestead exemptions, if they apply to your situation.
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File motions to avoid liens that impair your exemptions.
Chang & Diamond, APC, has a team of experienced bankruptcy lawyers who can provide personalized advice and help you navigate bankruptcy. We are available to answer any questions you have. Contact us now for a consultation.
