“Lien Stripping” and Chapter 13

“Lien Stripping” is a process in Chapter 13 bankruptcy, where you can eliminate or remove “junior” (meaning second or third mortgages) from your real estate.  Erase-Strip-Mortgage

Lien stripping allows you to get rid of those liens on your property that are wholly unsecured.  When a mortgage or lien is put on your real estate, its “priority” is usually determined by when it was recorded at the county courthouse.  Priority is pretty easy to determine:  first in time, first in right.  This means the earlier recorded lien has priority over any liens filed afterward.  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 gets paid.

Here’s How Lien Stripping Works:

If you owe more on your first mortgage than the value of your house, your second (or third!) mortgage lender is considered to be wholly or completely unsecured.  This just means that if you sold your home for its fair market value, there will be nothing left after paying the first mortgage.  The lenders for the junior mortgages won’t get anything.

The best way to understand this is to go over a simple example.

For example, say you own a house worth $100,000.  You have a first mortgage with a balance of $125,000 and a second mortgage for $15,000.  Since you owe more on your first mortgage than your house is worth – you are eligible to strip away the unsecured $15,000 second mortgage.

In this example, the second mortgage is considered unsecured and will receive the same treatment as your other unsecured debts (such as credit cards and medical bills).  Usually, these creditors receive little if anything in a Chapter 13 (at least the ones I have seen or worked on).

Now, you must receive a discharge for all of this to work.  Chapter 13 Plans are usually anywhere from three to five years long.

Here is an example of this process at work:

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.

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