What is Lien Stripping?
Lien stripping is the process used to split (bifurcate) a secured claim into two parts. The first part of the claim is secured to the extent of the value of the property. The second part of the claim is treated as unsecured since there is no value to which the claim can attach.
The statutory authority for splitting a claim into a secured and an unsecured portion is found in 11 U.S.C. Section 506.
How is Lien Stripping Used?
Lien stripping is used in Chapter 13 bankruptcy cases to wipe out debt owed to second mortgage holders or junior lien holders when the value of the property is insufficient to cover the debt owed on the first lien.
In today’s economy where many homes are worth less than the amount owed on the first mortgage, lien stripping offers a bankruptcy debtor an opportunity to eliminate debt owed to creditors junior to the first mortgage. This limited relief is an exception to the general rule that specifically prohibits modification of a debt owed on a debtor’s principal residence.
Prohibition Against Modification of Mortgage on Principal Residence
The prohibition against modifying a loan secured by the debtor’s principal residence prevents debtors from writing down the first mortgage debt even if the value of the house is less than the total of the debt owed.
Lien Stripping Not Available in Chapter 7 Bankruptcy Cases
In Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), the United States Supreme Court determined that lien stripping is not available in a chapter 7 bankruptcy case.
If you would like to find out more about lien stripping and whether you qualify to file a Chapter 13 case, schedule a consultation with an experienced Birmingham or Tuscaloosa bankruptcy lawyer. Call today and see how much money you can save.