Lien stripping simply refers to a process within a Chapter 13 bankruptcy that allows individuals who are upside down on their loans to get rid of any junior liens, such as second or third mortgages. “Upside down” means that the value of the home has dropped below the amount of the owed for the first loan balance. That results in the junior liens becoming unsecured, which essentially means that there is no collateral to secure the loan.
Within the context of a bankruptcy, a stripped lien is handled much like a credit card or medical debt. Once a lien is categorized as an unsecured debt the mortgage can be wiped out. In most cases, mortgage liens are secured debt. Typically, a property can be sold in foreclosure by the lender if mortgage payments are missed.
By filing Chapter 13 bankruptcy, the court can eliminate the second mortgage, removing the lien from the property through a process called a discharge. Once a junior lien is stripped, the lender can no longer collect on the loan or threaten to foreclose for any missed payments. Essentially, a lien strip wipes out the debt completely.
How Does Lien Stripping Work?
If the estimated value of a house has declined to the point where the balance of the first loan is higher than the fair market value, Chapter 13 bankruptcy can get rid of the second mortgage. This process is legally referred to as chapter 13 lien stripping.
A homeowner can strip any junior liens such as a second mortgage by proving that the value of the home is less than the amount of the first lien on the property. For example, if you have a first loan balance of $250,000 and a second mortgage loan balance of $50,000 on your house, an appraisal that proves that the house is worth $200,000 allows you to get rid of the second mortgage loan. Here is the same example as an equation:
1st mortgage balance= $250,000
Fair market value = $200,000 [less than the amount owed on the 1st mortgage = “upside down”]
2nd mortgage balance = $50,000 [unsecured = available for chapter 13 lien stripping]
Lien stripping makes sense on a common sense level. If a primary lender forecloses and sells a house that is upside down, the sale price will not cover the balance of the 1st lien, and there will be nothing left to pay the balance of a 2nd or 3rd lien. As a rule, the 2nd or 3rd lien must be completely unsecured to be eligible for chapter 13 lien stripping.
When Does The Second Mortgage Go Away?
When a homeowner files for Chapter 13 lien stripping, they immediately get the benefit of not having to pay the second mortgage. However, a debtor must complete the process that is required by the bankruptcy court and comply with the court-ordered plan to get a discharge order before the second mortgage can be eliminated. The junior mortgage is not eliminated until the debtor completes their chapter 13 bankruptcy payment plan and the court orders a discharge.
Get Your Free Consultation Today
Our attorneys can tell you right away if you have a 2nd or 3rd mortgage on your property which may be categorized as a lien that can be stripped. California residents who want to file Chapter 13 Bankruptcy to strip a second mortgage lien or want to know how to get rid of a second mortgage can consult with our Los Angeles Bankruptcy Attorneys; the first consultation is free!