Chapter 13 Lien Stripping: 4 Things You Need To Know

Posted on July 3, 2015 at 12:00pm by
Chapter 13 can save your home

Two weeks ago, we wrote about a rise in home equity loan delinquencies affecting homeowners across the country. However, more can be said about options available to homeowners who are underwater on their mortgages.

Lien stripping is the process of categorizing second or junior mortgages as unsecured debt, thereby making such liens dischargeable at the completion of bankruptcy. How does it work? It depends on each individual situation, but there a few things that can help clarify how lien stripping works.

  • To qualify for lien stripping in Chapter 13 bankruptcy, homeowners with multiple mortgages must owe more on their first mortgage than the market value of their house. For example, if the value of a house is appraised at $200,000 but a homeowner has a first mortgage for $250,000 with an additional second mortgage for $50,000, the second mortgage may be dischargeable.
  • Lien stripping is not an option under Chapter 7 bankruptcy. It never has been in either Kansas or Missouri, but now this rule applies nationwide. In a recent Supreme Court of the United States (SCOTUS) ruling, Chapter 7 bankruptcy rules relating to second mortgages have changed. SCOTUS held that lien stripping could not be done in a Chapter 7 bankruptcy, even if the first mortgage is underwater.
  • In Chapter 13 bankruptcy, second mortgages can be treated as nonpriority unsecured debt if lien stripping is successful. This means that at the completion of a bankruptcy, second mortgages can be treated in the same class as medical bills or some types of credit cards.
  • Homeowners with more than two mortgages can still benefit from Chapter 13 lien stripping.

Is The Chapter 13 Lien Strip The Only Way To Stop Foreclosure?

Homeowners facing foreclosure might have multiple options available to reduce payments, stop the process of foreclosure or discharge additional mortgages altogether. Contacting a bankruptcy attorney can help struggling homeowners find these options and build a future free of excessive mortgage debt.

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