How Lien Stripping Works in Chapter 13 Bankruptcy

How Lien Stripping Works in Chapter 13 Bankruptcy

by | Aug 5, 2020 | Chapter 13, Lien Stripping

Bankruptcy is never an easy process. However, it may become the best option for you. In this article, we will explain how lien stripping can work in your favor if you are severely struggling with multiple mortgages. As of now, lien stripping is only possible for Chapter 13 bankruptcy in the state of Georgia, not in Chapter 7 bankruptcy. For a homeowner wanting to save their house during bankruptcy, Chapter 13 will probably be the way to go.

Read more about Chapter 13

Because bankruptcy rules are many and sometimes complicated, it is always prudent to consult an experienced bankruptcy attorney about your choices. They may also be able to suggest alternatives to filing for bankruptcy. Our attorneys will work with your specific situation to determine your best options.

What is Lien Stripping?

Lien stripping is an effective method for relieving debts on a property.

The process involves turning junior liens into unsecured debt, which then receives the same treatment as other unsecured debt.

What is a junior lien?

If you already have a loan for a house, subsequent loans–such as a second or third mortgage–are called junior liens.

Do You Qualify for Lien Stripping?

You cannot automatically strip a second or third mortgage when you file under Chapter 13 bankruptcy. There are a few conditions you must meet first.

  • Your house must be “underwater.” In other words, the value of the property is less than the amount you currently owe in mortgages. In this case, even if you sold the house, you would not be able to pay off the mortgage lenders.
  • The second requirement is that the junior lien is “wholly unsecured.” This means that no part of the junior lien is secured in the value of the property. For example, suppose you have two mortgages. The first for $250,000 and the second for $150,000 (a total of $400,000). Let’s say, at a fair market price, your house is worth $350,000. This amount covers the first mortgage and part of the second mortgage.

In this scenario, the second lien is considered partially secured and cannot be stripped away in Chapter 13 bankruptcy. However, if you had a third mortgage of $50,000, there would be no money left from a sale to pay off any portion of this debt. Therefore, this third mortgage is a “wholly unsecured” lien.

Any junior liens completely unsecured by the property’s value can be stripped and converted to unsecured debt in Chapter 13 bankruptcy.

How This Helps You

When a junior lien becomes unsecured, it is no longer considered a priority. Creditors for unsecured debts may receive some compensation in your Chapter 13 payment plan, but the amount is usually minimal. Upon completing your Chapter 13 plan, the court will discharge any remaining unsecured debts and converted junior liens. To achieve this, however, you must keep up with your payment plan. If you start missing payments, the court will dismiss your case, and the junior lien will remain attached to your property.

Matthew Cherney


At Cherney Law Firm LLC, clients can expect the highest quality legal representation alongside thoughtful counseling and attention to detail. Mr. Cherney dedicates his time to properly investigating every possible avenue of debt relief for his clients before simply stepping into bankruptcy. Seeking to make each consumer that comes to him for legal aid as comfortable as possible, he keeps his clients in the loop with every step he takes.

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