WHAT IS A LIEN STRIP?
EXAMPLE:
Mom and Pop bought a house in 2005 and paid $202,000. They put down
$2000 and so the first mortgage is $200,000. At the closing the lender
offers a HELOC or line of credit secured by a second mortgage of
$50,000. Sometimes the homeowner may go a year or more from when
they bought the house before they get the 2nd mortgage. At any rate,
soon they get the second mortgage. Now the encumbrances on the home
are $250,000 which in 2006 may be realistic. But here comes 2008 and
2009 and the house is worth less than what Mom and Pop paid for it.
Now it is only worth $175,000. This means they are "upside down" or
"underwater" on their first mortgage; not to mention the second.
What can be done? Mom and Pop can file a Chapter 13 reorganization in
the United States Bankruptcy Court. There, Mom and Pop will be able to
strip off the second mortgage, permanently, as long as they complete their
reorganization plan. The reason they can do this is that the second
mortgage is no longer covered by any equity in the home. What about if
the housing values come back? It does not matter. It is the situation the
parties are in at the time of filing that counts. Complete your plan and the
2nd mortgage is gone.
WHAT IS A CRAMDOWN?
A lien strip is all or nothing. A cramdown most often applies to cars and
trucks and works like this. Mom and Pop, in 2006 were really doing good.
Both were employed and after they pulled their second mortgage they
decided to buy a Lexus for $45,000. $1000 down and monthly payment
over 72 months of $657. Things are good, for a while, but then at the end
of 2008 Pop loses his job and goes on unemployment. The balance on the
Lexus is $37,000. The $657 is now a total drain on the finances. What to
do; let the car go? But they have already paid for 2.5 years. In the same
reorganization, as in the lien stripping example, Mom and Pop can force
the lender to take payments on the VALUE of the car (now $17-20k)
instead of the balance of $37k. So here the difference between a strip
and cramdown is clear. A strip works, all or nothing and a cramdown is a
partial reduction of the original amount owed.
ARE THERE ANY OTHER BENEFITS TO FILING A CHAPTER 13
REORGANIZATION?
The other main benefit of filing a Chapter 13 is if Mom and Pop owe the
IRS. Penalties and Interest STOP the day of filing. Taxes older than
three years can be discharged.
EXAMPLE:
Mom and Pop bought a house in 2005 and paid $202,000. They put down
$2000 and so the first mortgage is $200,000. At the closing the lender
offers a HELOC or line of credit secured by a second mortgage of
$50,000. Sometimes the homeowner may go a year or more from when
they bought the house before they get the 2nd mortgage. At any rate,
soon they get the second mortgage. Now the encumbrances on the home
are $250,000 which in 2006 may be realistic. But here comes 2008 and
2009 and the house is worth less than what Mom and Pop paid for it.
Now it is only worth $175,000. This means they are "upside down" or
"underwater" on their first mortgage; not to mention the second.
What can be done? Mom and Pop can file a Chapter 13 reorganization in
the United States Bankruptcy Court. There, Mom and Pop will be able to
strip off the second mortgage, permanently, as long as they complete their
reorganization plan. The reason they can do this is that the second
mortgage is no longer covered by any equity in the home. What about if
the housing values come back? It does not matter. It is the situation the
parties are in at the time of filing that counts. Complete your plan and the
2nd mortgage is gone.
WHAT IS A CRAMDOWN?
A lien strip is all or nothing. A cramdown most often applies to cars and
trucks and works like this. Mom and Pop, in 2006 were really doing good.
Both were employed and after they pulled their second mortgage they
decided to buy a Lexus for $45,000. $1000 down and monthly payment
over 72 months of $657. Things are good, for a while, but then at the end
of 2008 Pop loses his job and goes on unemployment. The balance on the
Lexus is $37,000. The $657 is now a total drain on the finances. What to
do; let the car go? But they have already paid for 2.5 years. In the same
reorganization, as in the lien stripping example, Mom and Pop can force
the lender to take payments on the VALUE of the car (now $17-20k)
instead of the balance of $37k. So here the difference between a strip
and cramdown is clear. A strip works, all or nothing and a cramdown is a
partial reduction of the original amount owed.
ARE THERE ANY OTHER BENEFITS TO FILING A CHAPTER 13
REORGANIZATION?
The other main benefit of filing a Chapter 13 is if Mom and Pop owe the
IRS. Penalties and Interest STOP the day of filing. Taxes older than
three years can be discharged.
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