A lien is a notice attached to your property to give the public notice that a creditor claims you owe it money.
Liens are typically public record and are filed at your local records office or with the county clerk. Property liens can be complicated, and if you have any questions about how your property is impacted by a lien, you need to consult with your attorney.
What Happens When You Have a Lien on Your Home
Before a property is purchased, a prospective buyer will check all liens on the home to determine if the house is free and clear to purchase. If you have a property lien on the home, you do not have clear title, and selling or refinancing is tough and complicated. In fact, any prospective buyer would have to pay off the lien during the sale to clear title. That is a hard sale for many homeowners.
When Creditors Collect on a Lien
The rules on when a creditor collects on a lien depend on a few different circumstances, including state law. In some states, the mortgage has to be paid off before any creditor liens. This means if a creditor forecloses a home, they have to pay the mortgage payments or they also lose the home and the lien. This risk typically keeps creditors from foreclosing on a lien, but not always. If a creditor is trying to foreclose your home, it is important that you take action right away.
Do You Have a Second Mortgage on Your Home?
In today’s economy, it’s not uncommon for homeowners to have a second mortgage on their house. As a result, a common question when homeowners are considering bankruptcy is, “what happens to my second mortgage?” If you file bankruptcy under the terms of Chapter 13, you may be able to “cram down” or “strip down” your second mortgage. This is often referred to as “lien stripping.” Lien stripping is common in Chapter 13 bankruptcies when the current market value of a home is less than what was originally borrowed to purchase it. In these kinds of cases, a bankruptcy judge can remove a second mortgage on a home as part of a Chapter 13 bankruptcy filing.
Am I Eligible to have My Second Mortgage Crammed Down?
Under Section 506 of the bankruptcy code, a lien represents a secured claim when it is attached to an asset with value. Should a bankruptcy judge decide to strip down your second mortgage, it will be treated like unsecured debt. As a result, it will be treated like your credit cards and unsecured debt, assuming you comply with the terms of your Chapter 13 bankruptcy.
Lien Stripping and Filing for Chapter 13 Bankruptcy
Assuming you are eligible for a cram down on your second mortgage, you must also include certain kinds of information and documentation in your Chapter 13 bankruptcy filing. The following represents a short list of the kinds of additional information you will have to provide for lien stripping of your second mortgage:
- A current statement of your mortgage
- Declaration of your debt
- Appraisal of your home
- An appraisal declaration
- Additional documents as needed