What is Lien Stripping in Chapter 13 Bankruptcy?

"Lien Stripping" is a process available in Chapter 13 bankruptcy that can remove junior liens (second or third mortgages) and make the debt "unsecured".

Lien stripping in Chapter 13 bankruptcy refers to the process of eliminating your junior liens (such as second or third mortgages) from your real estate.

(To learn more about what happens to your mortgage in Chapter 13 bankruptcy, including ways to reduce it or avoid foreclosure, see the articles in Your Home and Mortgage in Chapter 13 Bankruptcy.)

Which Liens Can I Eliminate?

Lien stripping allows you to get rid of the “wholly unsecured” liens on your property. When a mortgage or lien is put on your house, its priority against other liens is usually determined by when the lien was recorded with your county. For the most part, the earlier recorded lien has priority over any subsequent liens. So if your house gets foreclosed on, your first mortgage lender will be paid first from the sale proceeds before the lender on your second mortgage sees any money.

In many cases, if you owed more on your first mortgage than the fair market value of your house, your second mortgage lender will not receive anything from the foreclosure because there will be nothing left over after the first mortgage is paid. If the lender won't get any money if your house is sold, your second mortgage is considered “wholly unsecured” and can be stripped through a Chapter 13 bankruptcy. (In a few states, you can strip junior liens in a Chapter 7 bankruptcy as well.)

Example. Say you own a house worth $300,000 and you have a $400,000 first mortgage. In this situation, you can strip any liens that are junior to your first mortgage. So if you had a second mortgage with a balance of $100,000, you can get rid of it through lien stripping in a Chapter 13 bankruptcy.

What Happens To Stripped Liens?

The stripped liens will receive the same treatment as your other unsecured debts (such as credit cards) in your bankruptcy. These debts usually receive nothing or a small amount and get discharged (wiped out) at the completion of your Chapter 13 bankruptcy. After discharge, your lender for the stripped lien will be required to remove its lien from your house.

(For more details about lien stripping and how it works, see Getting Rid of Second Mortgages in Chapter 13 Bankruptcy.)

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