Cramdowns and Lien Strips

Cramdowns

In a Chapter 13 bankruptcy, a cramdown is a process by which you can reduce the principal balance of a “secured” debt to the value of the property itself.

Simply put, you can cram down secured debts such as auto loans, mortgages on investment properties and/or other personal property including secured loans against items such as furniture. Where cramdowns differ from lien strips is that you cannot cram down the mortgage on your primary residence.

Lien Strips

As an Arizona homeowner, you may have a first and second mortgage on your home, but are unable to make both payments. Rather than lose your home to foreclosure, under Chapter 13 bankruptcy law, it may be possible to ask the court to discharge the second mortgage on your primary residence through a lien strip.

What is a lien strip? A lien strip is a process which enables your second mortgage to be “stripped” away or discharged, providing that certain conditions are met. Specifically, if your first mortgage balance is greater than the current market value of your home, in a foreclosure sale, since there would not be no proceeds left to pay off your second mortgage, your second mortgage would be considered “unsecured” and thus could be stripped away through a Chapter 13 bankruptcy.

Lien strips may also be used with investment properties.

Here’s an example of a lien strip. Let’s say your neighbor has a home currently valued at $300,000 with a first mortgage balance of $350,000 and a second mortgage balance of $75,000. Since your neighbor’s first mortgage balance is greater than his home’s current market value, he could have his second mortgage stripped away (discharged by the court).

Call 480-755-8000 to speak with our Arizona bankruptcy attorney today for immediate help.