New York bankruptcy debtors can sometimes be confused by bankruptcy terminology, one such example is the difference between “stripping” a lien and “avoiding” a lien. Both processes affect liens, but in very different ways and different contexts. Here’s the distinction.
In chapter 13, a New York bankruptcy debtor can try to strip, that is, eliminate, a lien that’s attached to some kind of property. The most common examples is the lien on a debtor’s home in exchange for a mortgage. Outside of the bankruptcy context, if a debtor stops paying on a mortgage, the lender can either sue the debtor (as with any other kind of debt) or foreclose on the property to resell it. Foreclosure is the option that lenders with liens can use over debtors. An unsecured lender, like the holder of a credit-card debt, cannot foreclose on anything because it has no lien on any of the debtor’s assets, though they can try wage garnishments and other tricks.
Chapter 13 debtors can eliminate the liens held by junior creditors on underwater mortgages. So if a debtor owes more on prior mortgages (including first mortgages) than a home-equity loan or some other junior mortgage than the home is worth,
then at the conclusion of a chapter 13 case he or she can eliminate the lien and discharge the debt, if it wasn’t discharged in a chapter 7 bankruptcy earlier. This means the debtor need not fear foreclosure from the junior lien holder. It’s out of the picture. Stripping a lien is a compelling advantage of filing and completing a chapter 13 case.
Avoiding a lien is not about foreclosure or repossession; rather, it’s about exemptions. Section 522(f) of the Bankruptcy Code essentially says that debtors are entitled to fully benefit from an exemption protecting a piece of property if a judicial lien attached to that property reduces the exemption. In other words, the lien “impairs” the debtor’s ability to use the exemption to its full value.
Here’s an example. Let’s say a debtor owns a home in New York City worth $170,825 and owes a judicial lien of $20,000 on it. The debtor has a homestead exemption of $170,825, the same as the home’s value. However, the lien impairs the exemption by $20,000, so the debtor can avoid the lien to claim the full value of the exemption. Click to read more details about “avoiding” liens in New York bankruptcy.
Stripping liens and avoiding liens do very different things in bankruptcy, so it’s important not to confuse them. If you are experiencing financial difficulties, and you own property that’s encumbered by a lien, be it a judicial lien or just a mortgage lien, then consulting with an experienced New York bankruptcy lawyer is a smart way to strategize your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
