Lien stripping is a way of eliminate second mortgage and/or home equity lines. With the decline in housing values, lien stripping has becomes more prevalent in Chapter 13 bankruptcy filings.
A lien strip allows us to transform a secured second mortgage or home equity line of credit into an unsecured debt, thereby eliminating a monthly payment and reducing total debt by tens of thousands of dollars.
Let’s say that your home is worth $250,000 today. When you purchased it you paid $450,000. Since then the housing market tanked. Now your home is worth much less of what you paid for it. Your mortgage balance is $370,000 for your first mortgage and $56,000 for your equity line. Your mortgages are considered “underwater” as your amount owed is more than your home is presently worth. In your Chapter 13 bankruptcy we would ask the bankruptcy court to “strip away” the second mortgage since all of the value your house presently has is tied up with your first mortgage. In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing. The second mortgage lender is, therefore, considered unsecured.
Remember this only works when:
You are a debtor in a Chapter 13 case
The mortgage loans are in your name
The fair market value of your house is less than the balance due on your first mortgag