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How Bankruptcy Impacts a Lien

Queens, NY attorney explains how the process treats encumbered property

In a bankruptcy case, the disposition of the debtor’s property can be complicated by liens that give creditors certain rights. That means the property cannot be sold to pay off other debts. But what happens to the lien in bankruptcy depends upon several factors, including the type of bankruptcy that is filed. At Mark E. Cohen, Esq., I will apply my more than 28 years of practical experience in personal bankruptcy cases to counsel you on the bankruptcy treatment of property subject to liens and to help you work out a positive outcome in your case.

What is a lien?

A lien is a security interest in property based on an associated debt. Examples are mortgages on real property and installment loans for automobiles. Liens can arise at the time the property is purchased or later on if the property is used to secure a loan. Although the borrower holds title to the collateral property, in reality he or she only has an equity interest equal to the value not encumbered by outstanding loans.

A lien can also result from someone performing work on a property, such as a contractor hired for home improvements. To enforce payment, the contractor may go to court, get a judgment for the amount owed and ask the court to place a mechanic’s lien on the property.

A lien prevents the owner from selling the property without paying the lien holder what is owed. In the event of default on the loan, a lien holder may repossess or force a sale of the collateral property to satisfy the debt.

What happens to a lien in Chapter 7?

In a Chapter 7 bankruptcy, property may be sold to pay off creditors. Secured property is treated differently, in that the lien holder may repossess the property even though the underlying debt is discharged.

You may be able to keep the collateral property in one of three ways. You can pay off the loan using funds not part of the bankruptcy estate. If the property is worth less than the outstanding loan, you may be able to redeem the property by paying its actual value. A third way is to reaffirm the debt and agree to make payments according to the original terms. Redemption and reaffirmation require the lender’s consent and the court’s approval.

What happens to a lien in Chapter 13?

Filing a Chapter 13 bankruptcy allows you to restructure your debts by entering into a plan to repay them over a three-to-five-year period. This includes any arrearages on a secured loan. The secured loan itself is not discharged, but the Chapter 13 plan often makes it feasible to keep the collateral property and to meet your regular payments.

Chapter 13 also allows for:

  • Lien stripping — If there are multiple liens on a property and the property’s value is insufficient to pay off the most senior lien, the junior liens may be eliminated and those loans converted to unsecured debt.
  • Cramdown — In some cases, if the collateral property is worth less than the outstanding loan, the court can reduce the secured debt to the current market value and also reduce the interest rate. The remainder of the loan balance is converted to unsecured debt.

At the end of the Chapter 13 repayment plan, the court discharges your remaining eligible unsecured debt but your secured loans and their liens remain in force. For many homeowners, Chapter 13 bankruptcy is a proven strategy for avoiding foreclosure and getting back on track with their mortgage payments.

Contact a knowledgeable bankruptcy lawyer in Queens, NY

Mark E. Cohen, Esq. provides personalized bankruptcy advice for debtors in Queens and throughout New York City and its surrounding counties. To schedule a consultation, call 718-223-5492 or contact me online. My office is conveniently located on Old Country Road in Westbury.


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