Lien-stripping is a technique employed in bankruptcy to divide a mortgagee’s secured claim into secured and unsecured parts. This enables the debtor to alter the mortgage terms and decrease the debt to match the market value of their home. Nevertheless, the U.S. Supreme Court has banned lien-stripping in all Chapter 7 cases and in Chapter 13 cases where the debtor’s primary residence is involved. Additionally, the Bankruptcy Reform Act of 1994 amended the Bankruptcy Code to forbid lien-stripping in Chapter 11 cases concerning an individual’s primary residence.
Lien-stripping is a bankruptcy practice that involves dividing a mortgagee’s secured claim into secured and unsecured components. This allows the debtor to reduce the claim to the market value of their residence, enabling them to modify mortgage terms and decrease the debt amount. For instance, if a debtor owes $200,000 on a mortgage for a home now valued at $150,000, lien-stripping would split the claim into a secured portion of $150,000 and an unsecured portion of $50,000. The unsecured portion can be discharged in bankruptcy, and the debtor can modify the mortgage terms on the remaining secured portion. However, the U.S. Supreme Court has banned lien-stripping in all Chapter 7 cases and in Chapter 13 cases involving a debtor’s principal residence. The Bankruptcy Reform Act of 1994 also amended the Bankruptcy Code to prohibit lien-stripping in Chapter 11 cases involving an individual’s principal residence. These examples demonstrate how lien-stripping operates and the restrictions on its use in bankruptcy cases.
Lien-stripping is a legal process that allows a debtor to remove a junior lien from their property in a Chapter 13 bankruptcy case.
In lien-stripping, the debtor’s attorney files a motion with the bankruptcy court to remove the junior lien from the property based on the property’s current value and the amount owed on the senior lien.
Not all junior liens can be stripped in a Chapter 13 bankruptcy. Only junior liens that are wholly unsecured can be stripped.
A wholly unsecured junior lien is a lien that has no value in the property because the amount owed on the senior lien exceeds the property’s current value.
Lien-stripping is not available in a Chapter 7 bankruptcy. It is only available in a Chapter 13 bankruptcy.
The main benefit of lien-stripping is that it allows the debtor to remove a junior lien from their property, reducing their overall debt burden and potentially saving them money.
One potential drawback of lien-stripping is that it may not completely eliminate the junior lien, as the lienholder may still have a claim against the debtor personally.
Yes, the lienholder has the right to contest the lien-stripping motion in bankruptcy court.
The timeline for the lien-stripping process can vary, but it typically takes several months from the filing of the motion to the court’s decision.
It is highly recommended to seek the assistance of an experienced bankruptcy attorney to navigate the lien-stripping process and ensure the best possible outcome.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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