Getting Rid of Liens in a New York Bankruptcy

Bankruptcy might wipe out all of your debts, but it doesn’t automatically wipe away liens. And this can be a big problem.

Fortunately, you can get a lien stripped away by meeting a few specific conditions.

#1) The lien is not your primary lender’s lien.

There is no way to strip away the claim your primary mortgage lender has on your home. Your primary mortgage lender is known as the senior lienholder.

This doesn’t mean you can’t sell the property; it does mean you have to use the proceeds to pay them off before you pay yourself.

See also: 5 Things You Need to Know Before an NY Short Sale.

#2) The lien isn’t secured by your home.

This may seem a little confusing, because of course you had to put your home up as collateral in order to get that second mortgage, also known as a home equity loan. But often there is no equity in the property at all after you deduct the payoff balance of the home from the home’s current fair market value.

If you are upside down on your mortgage this is exactly the situation you will be in. At that point, the court will rule that the second mortgage is essentially an unsecured loan.

#3) You’re filing Chapter 13 bankruptcy.

Once upon a time you could have done it in Chapter 7 bankruptcy too, but the 2015 Bank of America v. Caulkett decision changed all that. In this 2015 case, the Supreme court ruled against allowing the practice in a Chapter 7 bankruptcy.

Having a second mortgage may be one reason why a Chapter 13 is a better choice for your specific situation. But not always. If you don’t want to try to keep the home it will become part of the bankruptcy estate and the Chapter 7 trustee will distribute any proceeds from the sale of the home to the various banks involved as he or she sees fit. 

See also: What Do You Need to Know to File for Chapter 13 Bankruptcy?

#4) You successfully complete your Chapter 13 plan.

The lien doesn’t go away until your discharge. You’ll have to make all your payments for two to five years as outlined in your Chapter 13 plan.

But once you do that all the debt from your second mortgage gets wiped away, in addition to your lien.

You will still have your first mortgage to contend with if you intend to stay in the home. 

You’ll have to keep making those payments, even after your discharge. The hope is the release of your other debts frees the funds you need to do this without getting behind.

Some people use Chapter 13 as a time to secure a mortgage modification, or even to sell the home in order to avoid the prospect of foreclosure. Speak to your bankruptcy attorney about the best course of action.

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