A lien is a type of security interest that is given to a creditor to ensure that you pay back the money owed. When you finance a car – or anything else for that matter, the car lender will have you sign a security agreement. This agreement will provide that the car lender shall have a security interest, or lien, on your car for the amount of money loaned to purchase the car. This simply means that if you fail to make the payments, the car lender can repossess your car and sell it to recover the money owed. It also means that if the amount the car is sold for falls below what you owe, the car lender can sue you for the difference pursuant to the underlying note.
Liens Survive Bankruptcy
Liens play a very important role in the bankruptcy process. One thing that people often do not realize is that a lien on your property will survive bankruptcy. For instance, if you file a Chapter 7 case, you will receive a personal discharge of your debts, unless that debt is excepted from discharge. Looking to the above example regarding the car, even though you have filed bankruptcy, you still have to make your car payment if you want to keep your car; however, if you fail to make payments and the lender sells the car, it cannot come after you for the difference because your debt has been personally discharged. So if you were hoping to keep your house by filing Chapter 7, an experienced Atlanta bankruptcy attorney would advise you to file a Chapter 13 instead, which will give you the opportunity to file a plan to repay your debts over time, including your mortgage arrears.
One of the biggest benefits of filing a Chapter 13 bankruptcy is the ability to cram-down a creditor’s lien to the value of the property securing it. Lien stripping is an great way to lower your car payments (unless your car was financed within 910 days of the petition date, in which case it will be protected from lien stripping) or completely eliminate your second mortgage. Debtors can do this because under the bankruptcy code, the lien must be able to attach to some interest the debtor has in the property. If the first mortgage balance is higher than the value of the home, the debtor has no equity for the second mortgage lien to attach to. As a result, the mortgage can be stripped from the house, and the debtor will no longer have to make those payments. This can save people filing bankruptcy in Georgia thousands and thousands of dollars.
While bankruptcy gives you the option to cram down the balance of loans to the value of the property securing them, there are certain restrictions. The biggest and most debated issue is the inability to modify the first mortgage secured by the debtor’s principal residence. Fortunately, your second mortgage can be stripped, potentially saving tens of thousands of dollars, and any rental property you may own can also be crammed down to its fair market value.