Mortgages may disappear after your bankruptcy discharge, but liens stick unless your lawyer can make a case for removing them. Fortunately, there are established mechanisms in place which allow us to do just that.
Your loans just have to meet some specific conditions to allow it. And you have to file the right type of bankruptcy.
Senior Liens vs. Jr. Liens
The first mortgage you took out on your home is the senior lien. This lien will not go away.
It doesn’t keep you from selling the house. It does mean that the mortgage company gets the proceeds from that sale before anyone else does.
A Junior Lien would be any additional lien that’s on the house. This could be a HELOC or a contractor’s lien. We see HELOC’s more often than the latter, but either type of lien could be at issue here.
Chapter 7 or Chapter 13?
When you file Chapter 7 a certain amount of your home equity is exempt. But you won’t get to keep the house. The trustee will sell it, and the proceeds will be used to pay off creditors. That’s what Chapter 7 is all about. Exempt equity just means that you can get back that amount of money from the sale, if there’s any money to get back. More likely there isn’t, especially if you have multiple mortgages.
Either way, the liens won’t be a problem because you won’t have the house anymore.
Chapter 13 is different; it’s the form of bankruptcy that allows you to keep your home. You’ll have a mortgage payment throughout the plan, and you’ll have a mortgage payment after the plan is complete. That does not mean you want to walk out of bankruptcy burdened with a bunch of liens, because eventually you might want to sell the house, and the debt isn’t necessarily “gone” if you have to turn around and give whole portions of that money to someone whose debt you’ve already discharged.
Secured or Unsecured?
While you can strip liens from a home during a Chapter 13 bankruptcy, it can only be done when the loan is unsecured.
This confuses some people, because of course if you got a home equity loan your house was indeed used to secure the debt. But the bankruptcy court will subtract the value of your senior lien holder’s claim from the current value of the home. If the result is zero or less, the court will rule that the junior liens are unsecured and may therefore be stripped.
This does not mean you will get zero relief on the senior lien holder’s claim. At least, not if we’re talking about your primary residence.
Primary Residence or Property?
If we’re talking about your primary residence, and for most people we will be, then your attorney can also help you petition the court for a “mortgage cram down.” The cram down will take the current value of the mortgage and reduce it down to the value of your home. It only helps if you are upside down, but it does help a great deal.
There are other things that can be done as well: Chapter 13 is an ideal time to pursue a lasting loan modification.
But in all these cases, you will still want to work closely with your bankruptcy attorney to find the best solution for your home and your financial situation.