Well folks, it's time for part two of how to maximize your bankruptcy exemptions: lien stripping. Last week we discussed lien avoidance as a way to remove the secured status of certain lien that impair your bankruptcy exemptions.
Today I want to say a few words about lien stripping, which refers to the stripping of the secured status of a lien that is not adequately secured by equity in an asset.
Lien stripping, also referred to as a lien cramdown, involves the removal of a secured portion of a lien in cases where the present market value of the asset is not sufficient to secure the entire lien. That is, a lien is only a secured claim to the extent that the asset to which it attaches has value. In situations where the lien exceeds the value of the asset, that portion of the lien exceeding asset value is unsecured.
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To clarify let's consider the following situation regarding automobile loans, which is a common application of lien stripping. Pretend you currently have a remaining balance of $20,000 on your car loan. According to Kelley Blue Book, the current market value of your car is only $13,000.
Lien stripping may be applied during your bankruptcy proceedings such that the secured portion of your car loan is reduced to $13,000 and the remaining $7,000 of your loan is stripped of its secured status, to unsecured.
Lien stripping is a valuable tool available in both chapter 13 and chapter 11 bankruptcy. Unfortunately, lien stripping does not apply when filing chapter 7 bankruptcy.
Unlike the avoidance of specific liens that impair exemptions, most liens can be stripped if they meet these requirements. The one big exception to this is the primary home mortgage.
Currently, bankruptcy law states that voluntary liens secured only by the residence of the debtor cannot be stripped in chapter 11 or chapter 13 bankruptcy. The bright side is that, in Arizona Bankruptcy Court, second mortgages that are wholly unsecured may be stripped of their secured status. Keep in mind that these details may change as congress reviews and revises bankruptcy law.
Another important point to make is that the recent changes to bankruptcy law appear to limit lien stripping of automobile loans to those vehicles purchased outside of 2 ½ years. That is, the amendment says that §506 does not apply to those vehicles purchased within the last 910 days. Thus lien stripping may not help you recover that large chunk of value your new car loses when you drive it off the lot.
To sum it up, both lien stripping and lien avoidance can be powerful tools that may save you a large sum of money when filing for bankruptcy. These are pretty complex topics, and thus best handled by a qualified bankruptcy attorney.
As always, I am a licensed bankruptcy lawyer available for free consultations at my Phoenix office if you need any questions answered regarding your Arizona Bankruptcy.
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