Chapter 13 bankruptcy and the elimination of a second mortgage

Chapter 13 bankruptcy and the elimination of a second mortgage "In Chapter 11 and Chapter 13 bankruptcy cases, lien stripping is an effective method for reducing payments to creditors. In Chapter 13, debtors restructure their debts into a repayment plan, whereas Chapter 11 is for businesses and individuals whose debts exceed Chapter 13's limits.Lienstripping is the capacity of a debtor to reduce an unsecured creditor's claim based on the value of the underlying collateral. This is also known as bifurcation, wherein the claim of an unsecured creditor is divided into secured and unsecured portions. The portion of the lien that is unsecured is separated from the collateral and becomes an unsecured claim. For instance, if a debtor purchased a commercial building with a mortgage of $500,000 and the building's current market value is $300,000, the debtor would be in default. The creditor's lien is insufficiently secured and is divisible into a $300,000 secured claim and a $200,000 unsecured claim. The debtor is only required to repay $300,000 over the term of the loan, with the remaining $200,000 eligible for discharge upon successful completion of the plan. Since lien stripping is exclusive to bankruptcy cases, nonbankruptcy laws require the debtor to pay the entire amount. Chapter 7 cases, which are used to discharge unsecured debts, do not permit lien stripping because liens pass through Chapter 7 cases undisturbed.However, there are restrictions on the debtor's ability to value claims on the primary residence and financed vehicles within 910 days. In its wisdom, Congress has prohibited homeowners from refinancing their primary residence. If the debtors have one mortgage on their home, they are unable to reduce the loan to the property's value. However, the debtor may eliminate a second mortgage that is not secured by the property's value. For instance, if the debtor has a first mortgage of $300,000 and a second mortgage of $100,000, and the value of the property is $250,000, the debtor is permitted to remove the second mortgage. In Chapter 13 cases, Congress imposed an additional restriction on the removal of liens on vehicles financed within 910 days of the bankruptcy filing. A vehicle that has been financed for more than 910 days may have its title reduced to the value of the collateral, allowing the debtor to make reduced payments based on the current value of the vehicle rather than the outstanding loan balance. The debtor is not required to pay the contract rate if the interest rate is reduced to the current market rate.
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