Lienstripping is a approach in bankruptcy whereby junior lienholders are stripped, or removed from being a secured debt against the property. It applies only in Chapter 13 bankruptcy circumstances and only to the debtor's main residence. Lienstripping does not apply to rental properties or second homes.
In order to qualify for a lien strip in Chapter 13, debtors have to show that the current value of their property is worth less than what is owed on the initial, such that the junior lien is essentially unsecured debt. For example, a debtor who has a dwelling worth $500k with a first mortgage of $510k and a second mortgage or equity line of $90k would meet the specifications to have the lien stripped.
On the contrary, the exact same debtor would not be eligible for lienstripping if he owed $499k on his very first, due to the fact there is nonetheless $1k of security to which the second or equity line attaches to. The existing real estate climate getting what it is, most people who bought a house among late 2003 and 2007 would be eligible for a lien strip.
Once it is determined that a debtor is a candidate for lienstripping, a motion is ready and filed with the court. Creditors have an chance to object if they feel there is some security to the loan to be stripped, so it is vital to come to the table with solid evidence. It is suggested that a formal appraisal be accomplished on the property given that that is the very best evidence of value.
As soon as the judge enters an order permitting the lien to be stripped, the debtors no longer have to make monthly payments to their second mortgage and the debt is treated as an unsecured debt that is ultimately eliminated in the bankruptcy upon entry of discharge.
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