Lien stripping is the process of eliminating junior mortgages (2nd or 3rd mortgage, home equity lines, etc.) from your real estate as part of the Chapter 13 debt settlement process.
Lien stripping allows you to get rid of “wholly unsecured” liens on your property. When a mortgage or lien is put on your house, its priority against other liens is usually determined by when the lien was recorded in your county. In most cases, the lien recorded first has priority over any subsequently recorded lien.
You may be eligible to eliminate these junior liens if you meet the following criteria:
- You are a debtor in a Chapter 13 bankruptcy; and
- The value of your home (as determined by a comparative market analysis or appraisal) is less than what you owe on your 1st mortgage.
What does this mean to you? If you are able to eliminate a junior lien, you no longer owe that money and thus you would not have to make that monthly payment while you are in the bankruptcy nor after the case is discharged. Also, if the value of your home rebounds, you might end up with some equity in your home much sooner than you anticipated.
The eliminated lien will be treated as one of your unsecured creditors (such as a credit card) in your bankruptcy. These debts usually receive a very small amount of money through your bankruptcy and are discharged (wiped out) at the successful completion of your Chapter 13 bankruptcy. After discharge, you will be required to record the order eliminating the junior lien with the county recorder and the junior lienholder will be required to remove its lien from your real estate.