If your house has gone down in value since you bought it, a Chapter 13 bankruptcy may help you to get rid of your second mortgage. This is done through a process called “lien stripping.” Read on to learn about how you can use lien stripping to remove your second mortgage lien from your house.
Lien stripping is a Chapter 13 bankruptcy tool that allows people who are upside down (meaning your mortgage exceeds the value of your house) on their house to get rid of their junior liens such as second or third mortgages. Through a lien strip, the bankruptcy court essentially takes your second mortgage (which is a secured debt where the lender can foreclose on your property if you miss your payments) and converts it to an unsecured debt (just like a credit card debt) by ordering the lender to remove its lien from the property.
You can only strip your second mortgage or other junior liens if the amount of the senior liens on the property exceeds the home's market value. For example, if you have a first and a second mortgage on your house, your first mortgage balance must be more than what your house is worth before you can get rid of your second mortgage. If you have three mortgages, then you can strip both your second and third mortgages if your first mortgage is greater than the value of your house. However, if your house is worth more than your first mortgage alone but not more than the combined balance of your first and second mortgages, then you can only strip your third mortgage.
Example. Let’s say your house is worth $200,000 and you have a $250,000 first mortgage and a $50,000 second mortgage. In this case, since your first mortgage is greater than your house value, you can strip your second mortgage. Similarly, if you also had a third mortgage worth $30,000 in the above example, then you could get rid of that third mortgage as well. However, if your house was worth $275,000, then you have equity above and beyond your first mortgage so you cannot strip your second mortgage. But since the combined balance of your first and second mortgages ($300,000) is greater than $275,000, then you can still strip your third mortgage.
The second mortgage (or other junior lien) you strip is treated as a nonpriority unsecured debt when you file your bankruptcy. Just like medical or credit card debt in Chapter 13, you don't have to make payments on this debt outside of your bankruptcy. Instead, you will pay a portion of this unsecured debt (usually a very small amount) through your Chapter 13 plan. If you complete the plan, anything left on the mortgage is discharged (wiped out).
This all means that when you file for Chapter 13, right away you get the benefit of not having to pay your second mortgage. However, the second mortgage lien will not be removed from your house until you complete your plan and get a discharge. If your case gets dismissed before you complete your bankruptcy plan, your second mortgage lien will not be stripped.
In most districts, you can only use lien stripping in Chapter 13 bankruptcy. However, if you live in Alabama, Florida, or Georgia, you might be able to remove junior liens in Chapter 7 bankruptcy. To learn more, see our information on getting rid of junior mortgages and liens in Chapter 7.