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Florida Bankruptcy Lawyer: The Chapter 13 Plan, Part 2 Lien stripping

The plan created by your attorney is the most important document of the case. When confirmed, it binds all parties and creditors and may only be modified with Court approval. While there are certain requirements which a plan must contain, there are also things that a plan “may” do. A debtor can choose to designate classes of creditors, such as secured and unsecured and must treat each class fairly.
However the debtor has the right to designate classes such as consumer debts differently than other unsecured claims. The debtor may modify the rights of secured claims, other than the security interest in the debtors principal residence, or of the unsecured creditors or choose to leave any particular class unaffected and provide for the curing of any default.

As a practical matter, debtors who have certain secured claims with exorbitant interest rates can present a plan that reduces the interest rate that the creditor has applied against the property. Unsecured creditors are paid a small percentage of their totals, based on disposable income.

The most interesting aspect of the debtors power in the plan is the strip off or lien-stripping power. When an evaluation is done by the attorney, we look to see if the primary home, like many in Central Florida as well as around the United States, has lost value so that the value is proven to be worth less than what is owed on the first mortgage and note. If this turns out to be the case, then any other secured interest in the property, such as an equity line of credit or second mortgage, is now reclassified as unsecured debt and is treated in that class like any other unsecured creditor. Only a fraction of that debt is repaid and the remaining balance will be discharged at the conclusion of the plan.

As an example, say your home has a 1st mortgage on it for $200,000.00 dollars, a second mortgage for $68,000.00 and a $20,000.00 dollar equity line of credit. The market crashed and now your home is worth $174,000.00 dollars. In this case, so long as you prove its worth less than 200k, you can strip off both the second mortgage and equity line of credit but may not modify the 1st mortgage. You would therefore still owe the entire 1st mortgage but pay only a fraction of the second and equity line as unsecured debt, called a “cram down”, then discharge the balance.

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