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Lien Stripping in Chapter 13 Bankruptcy

Lien Stripping in Chapter 13 Bankruptcy

Chapter 13 provides the very powerful tool of “lien stripping”, or removing second mortgages and home equity lines from a home. Chapter 13 bankruptcy allows such second mortgage loans to be stripped from a debtor’s principal residence if that second lien is found by the Court to have become unsecured. In order to do this however, the second mortgage must be 100% underwater.  Lien stripping is ONLY available in Chapter 13 cases.  Chapter 7 clietns cannot strip off a junior mortgage.

To “strip” off a secured second mortgage the Chapter 13 attorney must file a motion with the Bankruptcy Court (Motion to Strip Lien) in the Chapter 13 case immediately after filing. If the debtor can prove that the home is worth less than the amount owed on the first mortgage then the Bankruptcy Court can rule that the second mortgage is unsecured debt.

This second loan is then lumped in with the debtor’s other unsecured debts, and treated the same as other general unsecured debts in the Chapter 13 Plan. At the conclusion of the Chapter 13 plan, any remaining balance is discharged. The Bankruptcy Court will then issue a judgment that voids the mortgage. The Chapter 13 debtor can then emerge from bankruptcy owning his or her home free and clear of the second, stripped mortgage loan.

Due to the healthy real estate market (at least here in the Atlanta metro area), we are not seeing very many client’s “strip” off their mortgages.  However, if we suffer another real estate “down” market, which we almost certainly will, this option will be available to consumers.

For more information about lien stripping and any other bankruptcy matter please contact us at or 404-889-8663.

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