Has the value of your house gone down since you purchased it? Is your first mortgage balance more than the value of your home? If the answer to these questions is yes, you may be able to strip any subsequent mortgage liens in bankruptcy.
Lien stripping is used in Chapter 13 bankruptcy in order to remove a junior lien on your home. A junior lien is any lien placed on your home after your initial mortgage. In order to strip a lien, the value of your home cannot be more than the balance of the first mortgage. Here's an example: Your home is worth $250,000. You have a first mortgage balance of $300,000 and a second mortgage of $50,000. If the home were to be sold, there would be no proceeds available to pay the second mortgage. In this case, you can strip the second mortgage lien in the Chapter 13.
Let's look at it conversely. Your home is still worth $250,000 but your first mortgage balance is $225,000 and your second is $50,000. Even though your second mortgage would not be paid in full from the sale of the home, the second mortgage lien cannot be stripped in Chapter 13 bankruptcy.
What exactly is stripping a lien and what does that mean for the debt? Stripping a lien is essentially taking that junior lien and changing it from a secured debt (one that the creditor can foreclose on if you don't pay) to an unsecured debt (like a credit card). The balance of the lien being stripped is treated as unsecured debt in the Chapter 13. This means that if you are required to pay any of your unsecured debt through the bankruptcy plan, that debt will be included in those payments. You do not have to pay it outside of the bankruptcy, and if you are behind on it, you do not have to catch up on those arrears in the bankruptcy (like you would a senior lien/first mortgage). If you complete your Chapter 13 and there is any balance remaining on the junior lien, it is discharged along with all other unsecured debt.
The lien is officially stripped once the bankruptcy is complete and the discharge has been entered. If your bankruptcy is dismissed, the lien will not be stripped. Lien stripping cannot be done in Chapter 7 bankruptcy.
All cases are different and it best to have a knowledgeable attorney to get you the best result. If you are considering bankruptcy, contact our office for a free consultation so we can discuss your options.
