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The Truth About Stripping a Second Mortgage Lien In Bankruptcy

MORTGAGE “LIEN STRIPPING” IN CHAPTER 13 BANKRUPTCY

For upside down homeowners (first mortgage loan exceeds value of your house) Lien stripping is permitted in chapter 13 bankruptcy cases to eliminate second mortgages. Through a lien strip, the bankruptcy court takes your second mortgage (a secured debt where the lender can foreclose on the property if you miss your payments) and converts it to an unsecured debt (credit card debt) by ordering the lender to remove its lien from the property.

Example. Let’s say your house is worth $300,000 and you have a $350,000 first mortgage and a $75,000 second mortgage. In this case, since your first mortgage is greater than your house value, you can strip your second mortgage. However, if your house was worth $375,000, then you have equity above and beyond your first mortgage so you cannot strip your second mortgage.

WHEN WILL SECOND MORTGAGE GO AWAY

The second mortgage you strip is treated as a non-priority unsecured debt just like credit card debt in Chapter 13. You no longer have to make payments on this debt outside of your bankruptcy. Instead, you will pay a portion of this unsecured debt (usually a very small amount) through your Chapter 13 plan. If you complete the plan, anything left on the mortgage is discharged. Simply put, Chapter 13 reorganization comes with the benefit of not having to pay your second mortgage. The second mortgage lien, however, will only be removed upon the completion of your chapter plan and receipt of discharge. If your case is dismissed before you complete your bankruptcy plan, your second mortgage lien will not be stripped.