Lien stripping is a procedure in a Chapter 13 Bankruptcy that changes a secured second mortgage or home equity line of credit into an unsecured debt, which not only eliminates your monthly payment, but usually lowers your total debt by thousands of dollars.
For example: Let’s say your house is worth $200,000. Maybe the home was worth $300,000 a few years ago but its fair market value has dropped like many other homes during the recession. The balance on your first mortgage is $230,000, and the balance of the second mortgage is $30,000.
In this scenario, a Chapter 13 debtor can ask the bankruptcy court to strip away the second mortgage debt because the value of the home is less than the amount of the first mortgage. So, if the house was sold, the first mortgage holder wouldn’t be paid back in full and the second mortgage holder would get nothing. The second mortgage holder is therefore unsecured.
Remember, however, that lien stripping is only an option when you are a debtor in a Chapter 13 Bankruptcy, and the fair market vale of your home is less than the balance due on your first mortgage.
