Most of us will remember the effort the Obama administration made in March and April 2009 to pass legislation permitting Bankruptcy Judges to modify or "cramdown" a mortgage to the present value of the homeowner's real estate. The legislation passed the House but was defeated in the Senate. Now, Congressman Barney Frank wants to give "cramdown legislation" another shot. The legislation would benefit homeowners whose homes are "underwater," i.e., of lesser value than the mortgage on the home, by cramming down the mortgage to the present value.
Another term getting a lot of press and a similar effect is "lienstripping" in bankruptcy. "Lienstripping" is bankruptcy jargon referring to a debtor's ability to reduce an undersecured creditor's claim to the present value of its collateral through claim valuation., Lienstripping has the effect of dividing an undersecured creditor's claim into secured and unsecured portions: The unsecured portion of the lien is "stripped" from the collateral and the deficiency between the total debt owed and the collateral's present value becomes an unsecured claim. The lien on the collateral remains only in the amount of the "secured" claim. Unfortunately, this process is limited to the reorganization cases, i.e., Chapter 11 (debtors whose debt amounts to over $1,010,050) and Chapter 13 cases and cannot be applied to the first mortgage of a debtor's principal residence (cramdown legislation would permit this extension) on the first mortgage. However, lienstripping can apply to a "junior lien" (second or third mortgage) on a principal residence. For example, Creditor 1 has a $200,000 claim on the principal resident and Creditor 2 has a $100,000 claim on the same home for a total of $300,000 and the home is only worth $160,000. By bifurcating the secured and unsecured claims, the Creditor 2's claim becomes unsecured and can be eliminated from the debtor's repayment plan.
Lienstripping applies to real estate, automobiles, boats, airplanes and other items. With exceptions and limitations, this process becomes quite complex and you should have bankruptcy attorneys such as Frazee/Laron handle these procedures for you.
