A lien is a “security interest” in property. A lien is a legal claim against property that you own. Your property is “collateral” or “security” for the loan.
If you default on your loan payments, that is, if you do not make the loan payments on time or at all, most liens allow the lender to repossess or foreclose and then sell the collateral.
Most commonly, real estate mortgages (trust deeds) and car / vehicle loans have lien provisions. These are “voluntary” liens that you agree to.
But other liens such as court judgment liens, tax liens, and mechanic’s liens are “involuntary liens.” They are involuntary because they are forced on you.
Homeowner’s association liens (HOA liens) probably could be characterized either as voluntary or involuntary.
A lien gives the lien holder certain powers over the collateral. The lien holder can often sell the collateral if there is a default. Also, you may not be allowed to sell the property until the loan is paid off. But sometimes for economic reasons, a lender will agree to allow the sale, i.e., a short sale of real estate.
Liens can sometimes appear on a credit report.
HOW DOES BANKRUPTCY AFFECT LIENS?
In bankruptcy, some liens can be “avoided” (For example, you can eliminate a judicial lien if it impairs a valid bankruptcy exemption).
Under Chapter 13, a debtor may “modify” the rights of holders of secured claims. (Chapter 11 bankruptcy also allows modification).
Lien Strip. In a 13 bankruptcy, in certain cases (frequently, a junior home loan), a lien can sometimes be “stripped” (called a “lien strip” or “strip off.”). When a lien is stripped, the loan’s lien is removed; thus, the loan becomes an unsecured debt like a credit card debt. Since unsecured debts are the “low man on the totem pole,” frequently, the loan amount you pay back is substantially less than the full amount.
Typically, lien stripping occurs when real property is “under water” (that is, the loan balance is more than the property value) and, further, the junior lien(s), e.g., 2nd mortgage, would receive nothing from a hypothetical forced sale of the property. In such a case, the junior lien can be stripped.
Cram Down. In a Chapter 13 case, a debtor may “cram down” certain loans (frequently, a car creditor). Typically a cram down can be achieved when a car loan balance is higher than the car’s value).
In a chapter 13 bankruptcy case, the car creditor’s claim is split into two different parts (bifurcation).
Example: A 2009 Honda Civic is worth $12,000.00 but you owe $15,000.00 to the car creditor. In Chapter 13 case, you pay $12,000 at the district interest rate (called the “Till” rate) over the life of your Chapter 13 plan. The remaining $3,000.00 becomes an unsecured claim and will be paid off interest free and often at a very substantial reduced amount.
Thus, because the creditor receives less money than what is owed, the debt is said to be “crammed down.” To “cram-down” a motor vehicle loan, you must have owned the vehicle for at least 910 days (about 2.5 years).
Also, a “cram down” does not apply to real estate which is your primary residence. But, you can utilize a Chapter 13 bankruptcy to cram down the mortgages on your investment properties.
Investment property typically means any property that is not your principal place of residence such as, for example, rental or commercial properties.
Under Chapter 7 bankruptcy, sometimes, after discharge, the lender of a 100% undersecured junior real estate loan (2nd mortgage or trust deed, HELOC, etc.), called a "worthless security," is willing to voluntarily negotiate a substantially reduced payoff amount or other reduced settlement of the mortgage debt.
During a Chapter 7 bankruptcy, sometimes (but not often) a car lender is willing to negotiate reduction of the principal balance, interest rate, or monthly payment (or a combination thereof) by means of a reaffirmation agreement. Further, bankruptcy law allows redemption of the car by paying in one lump sum payment the current market value of the car or the balance owed, whichever is less.
Article's Author: Christian Bankruptcy lawyer Matthew B. Tozer
Return to Bankruptcy FAQ
Return to Christian Bankruptcy Attorney