"Lien Stripping" -

     "Lien stripping" is a process where a debtor can "strip down" the claim of a secured creditor to the fair market value of the collateral securing the debt. Lien-stripping is not allowed in state courts, and is available only to those filing bankruptcy. It allows payment of only the "secured portion" of the debt, usually completely eliminates the "unsecured portion", and allows payment of the debt over time with a new interest rate based on current market conditions.

Restrictions on a Principal Residence

     It is generally available in Chapters 11 and 13, subject to certain restrictions on a principal residence. However, if it is a second mortgage, and there is no equity to which it can attach, i.e., the lien is completely "underwater", then the law treats it as if there were no lien, and the lien can be stripped off the property.

Chapters 7, 11 and 13

     Lien-stripping is not available in Chapter 7, and the secured debts simply "ride through" the bankruptcy filing. In Chapters 11 and 13, lien-stripping is generally available, and subject to certain restrictions on a principal residence.

Chapter 7 - Lien-stripping is not available in Chapter 7, and the secured debts simply "ride through" the bankruptcy filing. Chapter 11 - In Chapter 11, where the debt is secured only by a lien on property that is the debtor's principal residence, the lien cannot be stripped down to the value of the collateral. This is due to the "anti-modification" provisions of 11 U.S.C. Section 1123(b)(5). However, if it is a second mortgage, and there is no equity to which it can attach, i.e., the lien is completely "underwater", then the law treats it as if there were no lien, and the lien can be stripped off the property. Chapter 13 - In Chapter 13, there can be no lien-stripping where: the debt is secured only by the debtor's principal residence; where the collateral is a car and it was bought within 910 days before the bankruptcy filing; and where the debt is purchase money, is secured by "any other thing of value", and was incurred within 1 year prior to the bankruptcy filing.

Summary

     Lien-stripping is not allowed in state courts, and is available only to those filing bankruptcy. Before filing the case, however, the attorney should review the facts and see if lien-stripping will be available in the debtor's particular case and determine if this is a viable strategy.

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Written by Henry Rendler