Lien Stripping in Chapter 13 – Can it be done?
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 have more than one mortgage on your home, and the home is worth less than you owe one your first mortgage, you may be a candidate for lien stripping in chapter 13. Find out what you can do to improve your financial situation and live a better life. You have nothing to lose so call an experienced bankruptcy attorney and find out if lien stripping in chapter 13 can benefit you.