How does stripping off a lien work in Chapter 13?

On Behalf of | Aug 3, 2017 | Chapter 13 |

One of the advantages to Chapter 13 bankruptcy is that, for certain types of secure loans, a struggling family can actually improve their financial position by “stripping off” a lien, which is a completely legal process that involves converting what was a secured loan, like a second mortgage, in to an unsecured loan, like a credit card or medical bill.

In practice, this means that debtors have to pay what they can toward the debt via a repayment plan, but then will be free of the obligation. Debts that remain secured debts, on the other hand, may be “discharged” in bankruptcy, but the owner of the loan will still be able to pursue the house, car or other collateral.

The process of lien stripping varies among bankruptcy courts, but the theory is that if there is no equity in the house after accounting for the first mortgage, then the value of the collateral on the second or third mortgage is actually zero, since, if there were a foreclosure of the first mortgage, the lender who made the second or third loan would be stuck. Accordingly, the second and third mortgages can be considered uncollateralized or “unsecured” debts.

Lien stripping can be a complicated process for Bradley County residents, in large part because no creditor wants to lose its status as a secured creditor since that likely means fewer dollars in the creditor’s pocket at the end of the day. As such, creditors are likely to fight lien stripping during the bankruptcy process.

Post Type: Q and A


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