Link Talk Part 2 – Link Stripping and Cramdown

Well folks, it’s time for the second part of how to maximize your bankruptcy exemptions: lien removal. Last week we discussed lien avoidance as a way to remove the secured status of certain liens that impair your bankruptcy exemptions.

Today I want to say a few words about lien removal, which refers to the removal of the secured status of a lien that is not adequately secured by equity in an asset.

Lien stripping, also known as lien cramdown, involves the removal of a secured portion of a lien in cases where the asset’s current market value is not sufficient to secure the entire lien. That is, a lien is only a guaranteed right to the extent that the property to which it is attached has value. In situations where the bond exceeds the value of the asset, the portion of the bond that exceeds the value of the asset is not guaranteed.

To clarify, let’s consider the following situation regarding auto loans, which is a common application of bond settlement. States that you currently have a remaining balance of $20,000 on your car loan. According to Kelley Blue Book, the current market value of his car is only $13,000.

Lien removal can be applied during your bankruptcy process so that the secured portion of your auto loan is reduced to $13,000 and the remaining $7,000 of your loan is divested from its secured status, to unsecured.

Bond removal is a valuable tool available in both chapter 13 and chapter 11 bankruptcy. Unfortunately, the removal of links does not apply when you file for Chapter 7 bankruptcy.

Unlike the specific lien avoidance odd exemptions, most liens can be removed if they meet these requirements. The one big exception to this is the mortgage on the main home.

Currently, bankruptcy law provides that voluntary liens secured only by the debtor’s residence cannot be discharged in chapter 11 or chapter 13 bankruptcy. The silver lining is that, in Arizona Bankruptcy Court, second mortgages that are not fully secured can be stripped of their secured status. Please note that these details may change as Congress reviews and changes the bankruptcy law.

Another important point to note is that recent bankruptcy law changes appear to limit auto loan bond stripping to those vehicles purchased outside of 2 1/2 years. In other words, the amendment says that §506 does not apply to those vehicles purchased within the last 910 days. So removing links may not help you recover that much of the value your new car loses when you pull it off the lot.

In short, both lien removal and lien evasion can be powerful tools that can save you a large sum of money when filing for bankruptcy. These are quite complex issues and are therefore best handled by a qualified bankruptcy attorney.

As always, I am a licensed bankruptcy attorney who is available for free consultations at my Phoenix office if you need us to answer any questions about your Arizona bankruptcy.

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