Bankruptcy in Brief
a service of the Moran Law Group
Lien stripping in bankruptcy
Liens can be stripped off of the debtor's assets in Chapter
11 or Chapter 13 when there is not
enough equity in the asset, after deducting senior liens from the property's
current market value, to secure the lien.
Lienstripping can be used to make judgment liens and tax liens unsecured
in whole or in part, where the lien exceeds the value of the debtor's
Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured
claim to the extent there is value in the asset to which it attaches.
To the extent that the claim exceeds the value of the collateral,
that portion of the claim is unsecured.
In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages
and security interests, can be stripped down to the value of the collateral,
with the exception of voluntary liens secured only by the debtor's residence.
Unfortunately Congress has thus far failed to change to bankruptcy law to allowing
of home mortgages.
Contrast this procedure to lien
avoidance pursuant to § 522, where only judicial liens such as judgment
liens or voluntary liens on household goods can be avoided if the property
would otherwise be exempt.
Liens secured by vehicles
The most common application of lien stripping is the reduction of car loan
liens to the present value of the car. Thus a lender holding a
$12,000 claim secured by a car now worth $10,000 has a secured
claim of $10,000 and a unsecured claim for $2,000. Two thousand
dollars of the lien may be stripped off the asset (the car) in
a reorganization. The plan must provide for payment in full of
the secured portion of the debt; the unsecured portion can be
paid little or nothing along with other unsecured claims.
Recent changes to the bankruptcy law attempt to limit lienstripping
on vehicles purchased within 910 days of the filing. The amendment says
that " §506 does not apply" to such vehicles. It is unclear
just how courts will apply this inartful language; some courts are publishing
model Chapter 13 plans that allow the debtor to propose a strip down
of cars regardless.
Tax liens can be stripped off in reorganization proceedings (Chapters
11 and 13) to the extent that the lien does not attach to equity
in property. Tax liens can't be avoided in Chapter 7 on the grounds
that they impair exemptions; if the tax is dischargeable
in the Chapter 7, the bankruptcy court can determine the amount of the
lien that is secured at the time of the filing. Payment of that sum
entitles the debtor to the release of the lien.
Avoiding liens that impair exemptions.
liens after Chapter 7
Stripping voluntary liens