Today, I'd like to discuss lien stripping, which refers to the removal of a lien's secured status if it is not adequately secured by equity in an asset.
Lien stripping, also known as lien cramdown, is the elimination of a secured portion of a lien when the asset's current market value is insufficient to secure the entire lien. In other words, a lien is only a secured claim if the asset to which it is attached has value. When the lien exceeds the asset's value, the portion of the lien that exceeds the asset's value is unsecured.
To elucidate, consider the following automobile loan scenario, which is a common application of lien stripping. Consider that you have a remaining balance of $20,000 on your auto loan. The current market value of your vehicle, according to Kelley Blue Book, is only $13,000.
During your bankruptcy proceedings, lien stripping may be applied so that the secured portion of your auto loan is reduced to $13,000 and the remaining $7,000 is converted to an unsecured loan.
In both chapter 13 and chapter 11 bankruptcy proceedings, lien reduction is a valuable tool. Unfortunately, lien stripping is inapplicable for chapter 7 bankruptcies.
Unlike specific liens that impede exemptions, the majority of liens can be eliminated if they satisfy these requirements. The one major exception is the primary residence mortgage.
Current bankruptcy law prohibits the discharge of voluntary liens secured solely by the debtor's primary residence in chapters 11 and 13. Positively, in the Arizona Bankruptcy Court, fully unsecured second mortgages can be relieved of their secured status. Consider that these particulars may be subject to change as the Congress examines and revises bankruptcy law.
Importantly, the recent revisions to bankruptcy law appear to restrict lien stripping of auto loans to vehicles purchased within the past two and a half years. In other words, the amendment states that Section 506 does not apply to vehicles acquired within the previous 910 days. Therefore, lien stripping may not help you recover the substantial amount of value your brand-new automobile loses when you drive it off the lot.
In conclusion, both lien stripping and lien avoidance may save you a substantial amount of money when registering for bankruptcy. These are fairly intricate matters, and should therefore be handled by a qualified bankruptcy attorney.
As always, I am a licensed bankruptcy attorney offering free consultations at my Phoenix office if you have queries about filing for bankruptcy in Arizona.""
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