Lien Stripping and Removal of Second Mortgage
Which Liens Can I Eliminate?
Lien stripping allows you to get rid of the “wholly unsecured” liens on your property. When a mortgage or lien is put on your house, its priority against other liens is usually determined by when the lien was recorded with your county. For the most part, the earlier recorded lien has priority over any subsequent liens. So if your house gets foreclosed on, your first mortgage lender will be paid first from the sale proceeds before the lender on your second mortgage sees any money.
In many cases, if you owed more on your first mortgage than the fair market value of your house, your second mortgage lender will not receive anything from the foreclosure because there will be nothing left over after the first mortgage is paid. If the lender won't get any money if your house is sold, your second mortgage is considered “wholly unsecured” and can be stripped through a Chapter 13 bankruptcy.
Example. Say you own a house worth $300,000 and you have a $400,000 first mortgage. In this situation, you can strip any liens that are junior to your first mortgage. So if you had a second mortgage with a balance of $100,000, you can get rid of it through lien stripping in a Chapter 13 bankruptcy.
What Happens To Stripped Liens?
The stripped liens will receive the same treatment as your other unsecured debts (such as credit cards) in your bankruptcy. These debts usually receive nothing or a small amount and get discharged (wiped out) at the completion of your Chapter 13 bankruptcy. After discharge, your lender for the stripped lien will be required to remove its lien from your house.