Thursday, April 14, 2011

Chapter 13 Bankruptcy

A chapter 13 Bankruptcy is an option for individuals that earn a monthly income and can support making minimum payments of a period of 5 years to their secured creditors.  This can be greatly beneficial for a homeowner who is in arrears on his or her first mortgage.  In the current economic climate, the majority of homeowners have seen a dramatic drop in their home price.  This often leads to mortgage becoming unsecured.  Under the Bankruptcy code, property is only secured up to the value of the property.  This means that if a home has a mortgage for $150,000 and the home is appraised at $100,000, the mortgage is only secured to the amount of $100,000. 

Unfortunately there is nothing that an attorney can do to reduce the 1st mortgage on a principle residence home through Bankruptcy.  However, there is something an attorney can do to reduce the 2nd mortgage on a principle residence or the 1st mortgage of a secondary home through a Chapter 13 Bankruptcy.  The attorney can file a motion to devalue the lien, more commonly referred to as "Lien Stripping." 

A Lien Strip can be a great benefit for a Chapter 13 Bankruptcy client.  If a Bankruptcy client is able to stay current on his or her first mortgage, the lien strip can demand that the court consider the second mortgage unsecured debt.  Once the court approves the lien strip, the second mortgage is treated the same as credit card debt.  The amount that the Bankruptcy client pays to the unsecured creditors is determined by the liquidation assessment.

A liquidation assessment takes into consideration how much the unsecured creditors could be paid if the Bankruptcy client were to liquidation of his or her assets for their present value, minus the exemptions available. 

For example:
  • if Bankruptcy client A owes $100,000 in credit card debt and $90,000 on a second mortgage that has been lien stripped, client A will owe $190,000 in unsecured debt.
  • Client A owns a boat that could be sold today for $40,000
  • Client A also owns a very nice car worth $30,000.
  • Client A uses an exemption and reduces the assessed value of the boat to $30,000 and the car to $20,000 for a total of $50,000 in assets.
  • Client A will then be required to pay $50,000 over the next 5 years to the unsecured creditors.
  • Client A will have $140,000 of the unsecured debt discharged.
If you would like to learn more about Bankruptcy, contact the Law Office of Michael T. Krueger at 925.454.4460 or visit us at our website

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