Strip-Off and Strip-Down of Liens on Your Home or Car

Summary:  Both consensual (deed of trust) liens and nonconsensual liens (judgment liens) can be reduced or avoided entirely in a Chapter 13 plan, under some circumstances where some or all of a lien is “under water” because of a lower property value. You may get similar help in a Chapter 7 plan. Whether you can strip-down a lien on your car depends on how long you have owned it and whether you use it for business use.

Reducing the Amount of Liens on Your Home

Under Code Sections 506 and1322(b)(2), many Colorado homeowners can reduce the liens on their home in a Chapter 13 bankruptcy when the total amount of the liens exceeds the property value. This process is called “strip-down” or “strip-off.” of the liens. This applies to consensual liens (deed of trust) or nonconsensual liens (such as judgment liens.)

If the lien is fully stripped off, then the lien is removed from the property and the loan then becomes unsecured.

This can be very valuable because then the lien cannot be foreclosed on. Foreclosure for this lien is eliminated.

The reason is that if the lender forecloses on the property, the lender(s) cannot get more than what the market will bear.

Examples of the reduction of Colorado liens include:

1. Is your principal residence, but the lien is totally unsecured (prior liens equal to or greater than the value of the property), can strip it off (remove the lien entirely.); or

2. Mortgage is on a property which serves both as the residence and income producing property (multifamily property); or

3. Is a principal residence, but collateral is also other property, such as other real estate or personal property; or

4. Mortgage will mature during course of 13 plan, or has been reduced to J before BK; Can cram down interest rate and amount; or.

5. Not a consensual lien, such as a tax lien, j lien, or mechanics lien; or

6. Collateral is not a principal residence (such as vacation or rental); or

7. Lien of the creditor is not secured by real property, such as mobile home.

In addition to strip-down, in some cases the loan terms may be modified, such as reduction of the interest rate to the current market value rate. However, the loan may have to paid off during the plan.

And, if the mortgage has a final payment which becomes due during the pendency of a Chapter 13 plan, it may also be modified. This is really helpful with balloon mortgages.

Avoid Other Liens Such as Colorado Judgment Liens

Under Section 522(f)(1), a judgment lien may be avoided to the extent it impairs the homeowner’s property (usually $60,000) exemption.

Here, the judgment can be either reduced or totally avoided.

Generally strip-down, strip-off, and lien avoidance cannot be done in a Chapter 7 filing.

However, you can get other help in a Chapter 7 plan.

Reducing the Lien on Your Car

Whether you can strip-down a lien on your car depends on how long you have owned it (more or less than 910 days) and whether you use it for business use, in a Chapter 13 bankruptcy.