lien stripping

Example

“Lien stripping eliminated the $40,000 second mortgage because the home was worth less than the first mortgage.”

Memory Tip

STRIP the LIEN — underwater second mortgages can be eliminated in Chapter 13.

Why It Matters

Lien stripping can significantly reduce the total debt you owe in a Chapter 13 bankruptcy, allowing you to keep your home while eliminating second mortgages that have no equity backing them. This matters because it can make your bankruptcy plan affordable and help you rebuild your financial life without losing your primary residence.

Common Misconception

Many people believe lien stripping eliminates the debt entirely, but it actually removes the lien from the property and treats the remaining debt as unsecured debt that may be partially or fully discharged depending on your repayment plan. The second mortgage does not disappear; it just loses its claim to your home.

In Practice

Suppose your home is worth 250,000 dollars but you owe 280,000 dollars on your first mortgage and 50,000 dollars on a second mortgage. In Chapter 13 bankruptcy, the second mortgage lien can be stripped because there is no home equity to secure it, and those 50,000 dollars would be treated as unsecured debt in your repayment plan instead of a secured claim against your property.

Etymology

Modern bankruptcy strategy — stripping away underwater second mortgages.

Common Misspellings

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