The benefit for filing a Chapter 13 is that you may be able to strip your second mortgage. This is called a “lien strip” or “lien avoidance”. This can make a difference between being able to save your home or having it go through foreclosure. Lien Stripping does not necessarily mean your second mortgage is eliminated, but it is converted from a secured debt to an unsecured debt – and, it only occurs in a Chapter 13 bankruptcy. Once your Chapter 13 bankruptcy plan is completed (3 to 5 years), your second mortgage is eliminated much like your credit card debts. By changing its status to unsecured debt, it is treated the same as if it were to be a credit card or medical debt. The unsecured debt (including your second mortgage) will be discharged after your bankruptcy plan is complete, whereas your secured debt must be continued to be paid on (i.e., your first mortgage).

Example for Lien Stripping:

A home in California was purchased for $250,000. The debtor obtained a first mortgage for $200,000 (1st mortgage) secured by a deed of trust, and a 2nd mortgage of $50,000, also secured by a deed of trust. The value of the property has declined because of the economy and it is now only worth $180,000. Because the value of the property is now less then what the 1st mortgage is, the 2nd mortgage has no value, which then becomes unsecured.

In a Chapter 13 Bankruptcy, the owner may now have the second mortgage lien stripped off from the property. This means, it could be treated in the bankruptcy plan as ordinary unsecured debt.

How Lien Stripping Occurs:

During a foreclosure process, the property owner may declare bankruptcy (either a Chapter 7 or Chapter 13). However, in order for a Lien Strip to work, the debtor must file for Chapter 13. Filing bankruptcy freezes a foreclosure (also called an automatic stay). The bankruptcy court than reviews your case. In most Chapter 13 bankruptcies where the second mortgage has no equity, the court may rule the second mortgage as unsecured debt, which is called “lien stripping”.

This is What May Occur:

• The property owner purchases a home by obtaining a first and second mortgage.
• Due to the economy, the property value falls below what the debtor owes on the first mortgage.
• If there is insufficient equity left in the property to cover the second mortgage, the court may strip the second mortgage lien off the property. This means that the debt becomes unsecured debt.
• Filing for bankruptcy may stop a foreclosure from happening.

The process of lien stripping may occur during the bankruptcy process. This not only helps the debtor keep the home, but also eliminates some of the debt owed on the property.

A lien strip is not a typical occurrence in a bankruptcy. It requires extensive research and drafting of court documents. It should be performed by an experienced bankruptcy attorney. Hiring an attorney for this type of case is very important. You may need all the legal advice for this situation to help and ensure the process moves forward efficiently and successfully.