The practice of lien stripping is rooted in the reasonable belief that liens have no worth unless they are attached to actual value in property.

The recession that began in the last decade triggered a wide range of disagreeable effects felt by virtually all segments of our society.  One unpleasant consequence of the downturn is that many homeowners found out that the turmoil in the real estate sector left them with property whose market value was now less—often much less—than the amount owed on it.  This coined a term that quite suddenly came into widespread use: these people’s houses were “underwater.”  Luckily, bankruptcy law provides an option that can grant much-needed relief to property owners in this situation:  “Lien stripping” allows them to effectively ditch a second or third mortgage by transforming it into a relatively low-priority unsecured debt.  We’ll take a closer look at lien stripping below.
A feature of Chapter 11 and Chapter 13 bankruptcy law, the practice of lien stripping is rooted in the reasonable belief that liens have no worth unless they are attached to actual value in property.  If the value of the liens on a given type of property (e.g., a house or a car) exceeds the value of the property itself, then the courts can “strip” the excess liens—that is, reclassify them as unsecured debt.  In Chapter 13 cases, this can confer a huge benefit to the filer, as unsecured debts are paid off only after secured debts.  What’s more, the Chapter 13 repayment plan usually allows the filer to get away with giving the creditor holding the unsecured debt only a fraction of the amount originally owed.
We can best explain the process through a specific example.  Let’s say a homeowner’s property is currently valued at $300,000.  The homeowner has two mortgages associated with the property:  the first mortgage is worth $400,000, and the second, $100,000.  As you can see, the first mortgage is worth more than the property at its current market value.  In this case, the second mortgage is considered “wholly unsecured” because the value of the property is entirely covered by the first mortgage.  If the house were to be sold off, the holder of the second mortgage would get nothing, as there would be no equity left over after the first mortgage is dealt with.  The second mortgage, then, is summarily stripped away in a Chapter 13 case.
However, if the first mortgage doesn’t equal or exceed the current market value of the home, the second mortgage cannot be stripped.  So if a home is valued at $300,000 and the first mortgage is worth $295,000, then any second mortgage doesn’t qualify for lien stripping.  This stringent rule applies only for liens attached to a primary residence—and it’s important to understand that this procedure can be applied to several types of property, not just houses.  For other kinds of property, the bankruptcy code is more flexible.  If you have liens on an automobile, for example, that exceed the worth of the property, then all additional lien value can be converted to unsecured debt.  (Incidentally, lien stripping is not available for automobiles that were purchased within 910 days of the bankruptcy filing.)
Again, liens can be stripped from property only in the context of a Chapter 11 or Chapter 13 case; attempts to expand this practice to include Chapter 7 have encountered resistance from the courts in most jurisdictions.  If you’re not certain about your rights in bankruptcy court, then you should seek out the services of an experienced lawyer.  Long Island bankruptcy attorney Ronald D. Weiss has helped many clients; contact our office today for a free consultation.