Bankruptcy Lien Stripping and Cram Down Under Chapter 13 and Chapter 7

Primary Residence
If you seek to strip a lien from your primary residence there are two important limitations. First, this lien stripping is available in a Chapter 13 but not a Chapter 7. Second, the lien can only be stripped if it is totally unsecured. This fact can exist if there are two or more mortgages or a mortgage and a home equity loan. If the first mortgage exceeds the value of the primary residence then the second mortgage or lien is considered to be totally unsecured and can then be stripped from the collateral. This is not something that happens automatically, some special proceedings will be required.  

Tax Liens
Tax liens can not be stripped in a Chapter 7 but may still be stripped or subject to cram down in a Chapter 13 to the extent that the lien exceeds the value of the collateral. Cram Down is often the term used because the lien may still attach but simply be reduced to the fair market value of the property to which it attached. 

A tax lien may even attach to retirement savings and 401(k) plans that are beyond the reach of other creditors.

A tax lien is statutory so it can not be stripped or avoided as a lien impairing an exemption under § 522(f), 

Judicial Liens
Judicial liens that impair an exemption can be stripped in either a Chapter 7 or a Chapter 13 bankruptcy. But only to the extent that the lien impairs an exemption. An example of impairing an exemption would be a judgment, that complies with state law to create a lien on real estate and does in fact create a lien against a persons homestead. Assume there is equity in the homestead and that debtor is entitled to exempt the homestead in full. Since liens ordinarily pass through bankruptcy unaffected that judgment lien would impair the debtor's right to the full benefit of the homestead exemption. Consequently, that judicial lien should be subject to a lien stripping in bankruptcy. There are some limitations and the lien stripping in bankruptcy is not automatic. A procedure, such as a motion requesting the Bankruptcy Court to strip the lien is required.

Motor Vehicle
If you seek to cram down (reduce to fair market value of the collateral) a lien on a vehicle you may be limited by the 910 day rule. If the vehicle was purchased within 910 days of filing the bankruptcy petition then you can not cram down the lien. If the purchase was made more than 910 days before filing a bankruptcy petition and the vehicle is worth less than the loan a motion to determine secured status may be in order. The bankruptcy court can value the vehicle and then the debtor can pay off the vehicle in the Chapter 13 plan. This may also work in a Chapter 7 if the debtor is exercising a right to redeem. However, to redeem collateral would require paying the full amount of the determined value. The ability to Cram Down a lien to fair market value is not limited to motor vehicles but the Bankruptcy specifically prevents a cram down on a loan that is secured only be a debtor's primary residence. But don't overlook lien stripping a second mortgage. 

Redeeming Collateral
This can be done in a Chapter 7 bankruptcy but this option is rarely used since most consumer debtors can not afford to take advantage of this option. To redeem requires payment to the creditor for the fair market value of the collateral. A common example is a motor vehicle that the debtor needs to keep. There is a loan on the vehicle and the vehicle is worth far less than the loan pay off amount. In chapter 7, provided the 910 day rule does not apply, the debtor might be able to have the court value the vehicle and provide the debtor the opportunity to pay off the vehicle at the fair market value rather than the loan amount. This is a very good option under the right circumstances and for those who can afford it. There has been some talk about lenders making new loans available to debtors in Chapter 7 for this purpose. Of course this results in a new loan against the vehicle but it may be thousands less than the current loan. Redeeming can be tricky. Taking out a loan for the purpose of redeeming in bankruptcy before filing the bankruptcy would complicate things.