Lien Stripping

Lien stripping is one of the most powerful forms of relief available to you in Chapter 13 bankruptcy. The term “lien stripping” refers to the practice of removing junior mortgages where all the equity in a property is secured under a first mortgage. In California, unlike some states, it is possible to use lien stripping on a principal residence. It can also be used on an income property such as a second home or an apartment building.

No part of a junior mortgage, however, may be secured by the property, or else lien stripping is not available for that mortgage. Generally, a first mortgage is secured at least partly by the property and cannot be stripped. To determine whether lien stripping or bankruptcy may be viable ways for you to get your finances back on track, you should consult an experienced Los Angeles bankruptcy attorney.

How Does Lien Stripping Work?

If a second or third mortgage is not secured by any equity in your house or otherwise, the court may reorganize the amount as an unsecured debt in a Chapter 13 bankruptcy. Unsecured debts are usually items like amounts owed on credit cards or medical bills. In a Chapter 13 bankruptcy, you must agree to pay a set sum to the trustee on a monthly basis for 3-5 years. The trustee disburses a portion to various unsecured creditors.

Debtors with multiple junior mortgages worth more than the value of the home may ask the court to use a lien strip to completely remove that lien. If they successfully complete their Chapter 13 and obtain a discharge, at the end of the bankruptcy process, the court can remove or “strip” whichever junior mortgages are not secured by real property, and discharge the debts. Courts may also strip a home equity line that is not entirely secured. This process leaves debtors with only the secured first mortgage or mortgages to pay off after the bankruptcy.

On the other hand, if a lien is even partially secured by your property, case law dictates the court cannot remove it in Chapter 13 bankruptcy. This means that if you have a property with an objective value of $350,000, a first mortgage of $300,000, a second mortgage of $50,000 and a third mortgage of $10,000, only the third mortgage may be stripped because both the first and second mortgages are still secured by the property.

Moreover, if the real property is held in a joint tenancy, both owners must file Chapter 13 bankruptcy for the bankruptcy court to have jurisdiction over their mortgages. The junior lien can only be stripped from the portion of the real property held by the person or people filing for Chapter 13 bankruptcy.

In order to use a lien strip, you must get an objective valuation of your property from a real estate appraisal or use the value listed on your property tax bills. While you want the appraiser to state the lowest value possible, the trustee and creditors want the highest evaluation possible.

Is Lien Stripping Available in Chapter 7 Bankruptcy?

Most courts only allow lien stripping in Chapter 13 bankruptcy, but the 11th Circuit has ruled that lien stripping is available in Chapter 7 bankruptcy. In certain states in the 11th Circuit, it may now or soon be possible to obtain relief from junior mortgages that exceed the value of a property through Chapter 7. However, California is in the 9th Circuit, which has not yet made any type of ruling that would allow lien stripping in Chapter 7. In this state, lien stripping is one of the advantages of filing Chapter 13 over Chapter 7.

Lien stripping is not appropriate in every situation. Contact experienced Los Angeles bankruptcy lawyer Devin Sawdayi at 310-475-9399 or via our online form for advice on whether it makes sense for you.