There are a few key mechanisms available in a Chapter 13 bankruptcy that are not available in a Chapter 7 bankruptcy. These mechanisms are largely, in addition to the lack of an income eligibility standard, what make a Chapter 13 very attractive to some debtors. These mechanisms are:
- The Lien Strip: A lien-strip is a process by which a 2nd or 3rd mortgage on a primary residence is “stripped off,” which is to say, converted from a classification within the Chapter 13 Plan as “secured” debt to “unsecured” debt, at the bottom of the priority of payment. A lien-strip is possible where the property in question, in fair market value terms, is worth less than the 1st mortgage on the property. If that is the case, 2nd or 3rd or other inferior mortgages are considered to be unsecured by the value of that collateral and may be stripped.
Here in the Eastern District of Michigan, a lien-strip requires the filing of a separate law-suit called an Adversary Proceeding within the bankruptcy court to have the secondary lien declared to be unsecured.
- The Cram-Down: A cram-down is a similar process, in which a secured debt is reduced to the fair-market value of the property securing it, and the excess claim value is re-classified as unsecured. This is possible within a Chapter 13 Plan with an automobile if the car was purchased more than 910 days prior to the filing of the petition and if the car is worth less than what is owed on it. Thus, a car purchased 3 years and 1 day prior to the filing of the petition that is worth $5,000 but for which $10,000 is owed must be repaid as secured debt within the Chapter 13 plan only to the tune of $5,000. The other $5,000 is consigned to the low-priority unsecured debt classification and repaid only to the same percentage extent as the other unsecured debts.
Other property than a car may also be crammed down if the claim for that debt is of a secured nature. In some cases, a non-primary residence piece of real estate can have a secondary mortgage crammed down to a fair-market value of $0.00 of the property securing the claim is worth less than the 1st mortgage.
If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or email@example.com to schedule a free, initial consultation.