What is "Lien Stripping" in bankruptcy and how can it reduce my mortgage payments.

With the drastic decline seen in Rhode Island housing values, many individuals are finding themselves in situations where the balances of their mortgages exceed the fair market value of their home.  In a Chapter 13 bankruptcy petition, the US Bankruptcy Court can "strip" or modify second mortgages and home equity loans thereby eliminating a debtor's monthly mortgage payment and reducing his or her total debt by tens of thousands of dollars.

Here is an example:  Lets assume that your home has a current fair market value of $250,000. Perhaps the value of your home was $350,000 three to four years ago but its value has dropped due to the recession.  The balance on your first mortgage is $275,000  and the balance on your second mortgage or home equity line is $55,000.  In this scenario, a Chapter 13 debtor may "strip" the second mortgage holder's lien off their property and treat the entire balance of that debt in their Chapter 13 Plan as a general unsecured claim without priority.  As a general rule, a Chapter 13 discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328.

Mortgage modification in bankruptcy is a confusing topic and is only available in Chapter 13 cases. In some cases you can avoid a second mortgage lien and in other cases you cannot. As with most bankruptcy issues, the answer is: "It depends."

If you have a second mortgage or home equity loan and wish to keep your home, call my firm to learn how filing bankruptcy may help you.