In the current economic climate, borrowers are finding that their homes are now worth considerably less than they were four years ago. Although it is disheartening to learn that your home is worth less than you owe on it, there is a provision in Bankruptcy law that permits you to get rid of a second or third mortgage in Chapter 13. The process is referred to as "Lien Stripping" and involves avoiding a second or subsequent mortgage where there is no equity in the property after allowing for the amounts due to the first mortgage lender. Multiple mortgages may result either from obtaining more than one loan secured by your residence at the time of purchasing the property, or from obtaining additional mortgage loans later. In either case, if the property is worth the same or less than the amount due on a first mortgage, then the second or third mortgage Lien may be "stripped".
Example:
I have a residence now valued at $180,000.00.
I owe a first mortgage of $210,000.00 and a second mortgage of $35,000.00.
Because I owe more on the first mortgage than the property is worth, the second lien of $35,000 may be stripped. Note: You may not strip any portion of the first mortgage under this rule of law.
There is a requirement that you obtain an appraisal that proves the value of your residence and you must be prepared to argue your case in Court. If you win in Court, in order to complete the lien stripping process, you must complete your Chapter 13 case and obtain a discharge order from the Bankruptcy Court in order for the lien to be stripped.
Completion of your Chapter 13 case requires payments to the Chapter 13 Trustee for a total of three to five years, maintaining current payments to the first mortgage lender, and compliance with all rules and requirements of the bankruptcy Court.
There is a similar procedure for avoidance of Judgment Liens, which may be accomplished in both Chapter 13 and Chapter 7 cases.
