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What is Lien Stripping and How Can it Lower My Mortgage Payment?


With the substantial decline in housing values, there has been a drastic increase in lien stripping. The Bankruptcy Code allows a Chapter 13 debtor to “strip” a second mortgage (or home equity loan) by turning it into an unsecured debt. Stripping a second mortgage eliminates the monthly payment and can reduce your total debt by thousands of dollars.

A Chapter 13 debtor can file paperwork asking the bankruptcy judge to strip his or her second mortgage when the value of the real estate is completely encumbered by the first mortgage. This means that if you were to sell your home, there would be no money remaining to pay the second mortgage after the first mortgage was paid. This means the second mortgage is completely unsecured. In order to strip a second mortgage, there cannot be a penny of equity securing the loan.

Here is an example: Your home is worth $200,000.00. The first mortgage is $225,000.00 and the second mortgage is $25,000.00. In this scenario, there is no equity in the real estate securing the second mortgage. Therefore, in a Chapter 13 bankruptcy, the second mortgage lien can be stripped.

It is important to note that lien stripping is only available to Chapter 13 debtors. It is not available to Chapter 7 debtors. Additionally, lien stripping only becomes permanent once the Chapter 13 case is discharged. If your Chapter 13 bankruptcy case is dismissed for failure to make plan payments or if you convert the case to a Chapter 7 bankruptcy, your second mortgage will not be stripped, and you will still owe it post-bankruptcy.

In St. Louis bankruptcy cases, lien stripping requires an adversary proceeding, which is a trial within a bankruptcy case. A debtor has to obtain an appraisal of the real estate in order to establish the value of the home at the time of filing. The mortgage creditor will be given an opportunity to respond and even obtain their own appraisal. However, in most instances the creditor does not respond to the complaint and the case is won by default.

It can be quite complicated, but an experienced St. Louis bankruptcy lawyer can guide you through the process of stripping your second mortgage. The hassle is certainly worth the result! Contact us today to find out if your second mortgage can be stripped.


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