If you have a second or third mortgage on your home, you may be eligible to strip the 2nd or 3rd lien off your home if your home is worth less that your current 1st mortgage. Lien Stripping is not a new idea in Bankruptcy but due to the current housing crisis, the practice is gaining ground. Lien stripping was not a common practice in the past mainly because most people has at least some equity in their home. Nowadays, with home prices falling, lien stripping may be an option for many people who are upside down with their mortgages.

In a Chapter 13 Bankruptcy case, your debts are consolidated into a Chapter 13 Bankruptcy plan payment. Your debts are generally divided into 3 categories: Secured, Priority and Unsecured.   Secured and priority debts are generally paid at a rate of 100% while unsecured debt can be paid back at less than 100% depending on your individual circumstance.

Here is a general idea of how lien stripping works:  Lets day you bought your home in 2008 for $150,000.00. You took out a first mortgage of $125,000.00 and a second mortgage of $25,000.00. Let’s also assume you are 4 months behind on your first and second mortgages.  Your Chapter 13 Bankruptcy plan would include the 4 months of arrearage on your first mortgage, which would allow you to catch up the first mortgage.  The 1st mortgage cannot be stripped or currently modified by bankruptcy law. (This does not prevent the mortgage company from modifying your loan) If the current value of your home is worth less than $125,000.00, we may be able to strip the second lien away and make the entire 2nd mortgage debt an unsecured debt which may be paid out at less than 100%, in some cases 1%. Once you complete your Chapter 13 plan, the 2nd lien would be stripped from your home.

In order to strip a 2nd lien from your home, the Courts will require proof that your home is worth less than the 1st mortgage.  A professional appraisal on your home is recommended. Do not rely on the tax value or the fact that home prices in your neighborhood have fallen.  The appraisal must be realistic since the mortgage company may submit their own evidence of your home’s value.

If you would like to discuss the possibility of stripping the 2nd or 3rd lien from your home, please feel free to contact me at 404-378-0600 for a free consultation.

Ken Parker