Interviewer: What is meant by lien stripping over second mortgage?
James Logan: Lien strip just means you’re getting rid of stripping off, getting rid of a second lien in the house. If the lien is unsecured, meaning that the first mortgage is more than the house’s worth, then basically the second mortgage is just like a credit card anyways, not secured by anything. In the chapter 13, we can basically wipe that off the house. So, if you complete the chapter 13 plan and get a discharge, you’ll no longer be responsible to second mortgage and they can’t come after your house and force you to pay in any way.
Common Client Mistakes Detrimental to a Successful Discharge in a Chapter 13 Bankruptcy
Interviewer: What are some mistakes people make or what are some things that people should do when it comes to chapter 13? What are some ways that they can prepare and I guess not seeking a lawyer’s advice soon enough would be one thing to talk about?
James Logan: Yes, absolutely. Not seeking the lawyer’s advice is a big mistake. Once you start to fall behind in your debts, you should definitely consult with the lawyer and he can give you some real good advice. The number one mistake that I see people make is really struggling to pay on debts, they could wipe out or could get rid of in a bankruptcy and they struggle and they struggle to pay the debts and then they end up having to file the bankruptcy anyway. If you’d filed it sooner you would have saved a lot of money and have saved a lot of headache. A great example of that is many times, people take money out of their 401K or IRA to pay some kind of debt and that’s a huge mistake because the money in your 401K is protected in a bankruptcy from all your creditors.
Paying Back Debts of Friends and Family Members Prior to Filing Bankruptcy Can Create Problems for the Debtor
Once you take that money out, it’s no longer protected and if you spend it on the debts that you can wipe out, that money is just thrown away and at the end of the day, you don’t have any money left in the 401K. That’s a real mistake. Also, people would do things like payback friends and family and that creates a real problem in a bankruptcy because it’s called a preference and paying back your family and friends and then filing a bankruptcy creates a problem because a trustee could actually go after your friends and family to try to recover that money for your creditors. So, if you talk to a bankruptcy attorney upfront and get some advice, it could save you a lot of heartache, save you a lot of the sleepless night and it’ll allow you time to pay off debts and to hold on to things, it’s just not worth it.
The Red Flags that Precede the Filing of Bankruptcy For an Individual
Interviewer: Would you say that these are some of the red flags or warning signs that people should start considering bankruptcy what you just mentioned?
James Logan: Red flags are if you’re afraid to file for the credit because you think you’re going to get turned down, you might have problems. If you’re falling behind in your mortgage, that’s a definitely a huge red flag; if you’re falling behind in your car payments, that’s a huge red flag. Once you get behind, it’s very hard to catch up, it’s a snowball kind of a fact.