Understanding lien stripping

If you are thinking about filing bankruptcy in Minnesota due to your overwhelming debts, you likely have many questions about which kind of bankruptcy is right for you: Chapter 7, Chapter 13 or one of the other bankruptcy types. While all have their respective advantages and disadvantages, Chapter 13 has a special feature that may be just what you are looking for.

If you have two mortgages on your home, Chapter 13 offers you the opportunity to strip the lien against your house that your second mortgage holder holds. Bear in mind that whereas virtually all of your consumer debts, including credit card debts, get discharged in a Chapter 7, a Chapter 13 works differently. Here you have the opportunity to reorganize your debts and get three to five years to pay most of them off.

Secured versus unsecured creditors

One of the first things you do after filing Chapter 13 bankruptcy is to devise a plan whereby you renegotiate many of your debts with your respective creditors so as to be able to more easily repay them over time. As part of this plan, the court divides your creditors into two categories: secured and unsecured. Your creditors in the former category are those to whom you provided collateral. Conversely, your creditors to whom you provided no collateral fall into the latter category. They therefore have little or no chance to recover the full amounts of your debts to them.

Your second mortgage holder represents one of your unsecured creditors, particularly if you have little or no equity in your home. Consequently, the Bankruptcy Court has the authority and ability to strip your second mortgage holder of any lien it holds on your home. At the end of your bankruptcy period, the judge discharges all your unsecured debts that your repayment plan did not mention. Thus you have no obligation to repay the remaining amount of your second mortgage, only your first mortgage, as well as the remaining balances of your other secured debts.

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