If you are filing a Chapter 13 bankruptcy, you might qualify to get rid of (strip off or lien strip) your second mortgage. Lien Stripping is a Chapter 13 bankruptcy tool that allows people who are upside down (meaning your first mortgage exceeds the value of your house) on their house to get rid of their junior liens, such as second or third mortgages. Through this process, the bankruptcy court takes your second mortgage (which is secured by the house) and converts it to unsecured debt and orders the lender to remove its lien from the property.
Here is how it works: Assume you have a home valued at $300,000. There is a first mortgage for $325,000 and a second mortgage for $50,000. Because the senior lien (the first mortgage) exceeds the value of the property, any junior (second and third mortgages) liens can then be removed.
The junior liens do not automatically go away. A motion has to be filed and a hearing scheduled to allow the junior lienholder to object if they believe the value is higher than the amount owing on the first mortgage. Once the court grants the motion to strip the lien, the debt is then treated as an unsecured debt in the bankruptcy and is paid pro rata like the rest of the unsecured debts (credit cards, medical, etc.). Then, for the length of your case (3-5 years) you don’t have to pay on the second mortgage. When the bankruptcy is discharged, the Order Stripping the Lien has to be recorded in the county recorder’s office in the county where the property is situated. If your case gets dismissed before you finish your case, the lien remains and you would be behind on your second mortgage. In those cases, many clients will then file another case and we can start the process of stripping the lien again. As long as the value of the home has not increased to more than the amount owing on the first mortgage, the lien strip will still be successful.
Lien Stripping can only be done in a Chapter 13 bankruptcy case in the state of Utah.
Types of Bankruptcy
The bankruptcy team at Pearson Butler file three types of bankruptcies for our clients:
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If you would like to know more about lien stripping a 2nd mortgage, call now and arrange for a free initial consolation to assess whether lien stripping is an option for you. Feel free to call (800) 265-2314.