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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 unsecured  in whole or in part, where the lien exceeds the value of the debtor's property.

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. Congress is currently considering changes to bankruptcy law allowing the modification 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

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.

  Tax liens after Chapter 7

Stripping voluntary liens