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Lien stripping in Chapter 13 bankruptcy

Bankruptcy is hardly every an easy decision for people to make. There is much to consider, including both the negative credit consequences as well as the ability to start afresh. For some people, bankruptcy offers the chance to avoid foreclosure or at least reduce the chance of foreclosure. Another positive aspect of bankruptcy, for those whose homes have declined in value, is the possibility of getting rid of second and third mortgages. This is referred to as lien-stripping.

Lien-stripping is available is Chapter 13 bankruptcies, when there are liens that are wholly unsecured. That means that the lender of such a loan has no chance of being paid because there would be no money left over to pay any of the mortgage loan off after paying lenders with priority. Priority is usually determined by the order in which the liens were recorded. Lenders who recorded their lien first, then, are usually paid first from the sale proceeds. What is leftover can go to subsequent lenders. 

Typically, a second mortgage lender will not receive any payment if the debtor owes more on the first mortgage than the fair market value of the home. When a mortgage lien is stripped, it is treated the same way as other unsecured debts. Usually, this means that it is discharged at the end of the bankruptcy, en completed, when the payment plan has be

One important thing to remember, though, is that if the payment plan is not completed, the second mortgage lien—and any subsequent liens—will not be stripped away.

Lien stripping is not available in Chapter 7 bankruptcy in most states, including Kentucky. Those who have questions about second and third mortgages and how they are affected by bankruptcy should contact an experienced bankruptcy attorney to have their case evaluated. 

Source: Fox Business, “Can Chapter 13 Help Me Get Rid of Second Mortgage,” Justin Harelik, September 11, 2013. 

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