Using Lien Stripping in Your Bankruptcy

Blog

Jul 19

Question: “My brother filed bankruptcy and was able to get rid of the second mortgage loan on his house. I would like to do the same in my Chapter 7 bankruptcy, but my lawyer says I cannot ‘lien strip’. What is lien stripping and why can’t I do it as well?”

Answer: “Lien Stripping” is avoiding a creditor’s lien on property to the extent that it exceeds the value of that property. A good example might be a car loan. Imagine a vehicle that is worth $4,000, but you still owe the lender $9,000. Using lien stripping, you would pay that lender only the $4,000 value of the vehicle.

Lien stripping is an effective means to keep necessary or important assets without having to pay far more than what they are worth. It can be used on virtually any kind of property which serves as collateral.

Lien stripping is not always available, though. It is commonly used in Chapter 13 cases, which is what your brother filed. Even in Chapter 13, though, lien stripping is not generally available for use on homesteads. In a Chapter 13 bankruptcy, the stripped liens will receive the same treatment as unsecured debts. These debts usually receive nothing or a small amount and get discharged (wiped out) at the completion of your Chapter 13 bankruptcy. After discharge, your lender for the stripped lien will be required to remove its lien from your house.

Lien stripping is not available in Chapter 7 cases, which is what you are contemplating. The U.S. Supreme Court ruled in Dewsnup v. Timm, 112 S. Ct. 773 (1992) that lien stripping was prohibited in Chapter 7 cases.

Bankruptcy discharges debts, but generally does not discharge liens. The creditor’s lien remains with the property. This is what makes lien stripping such a valuable tool for people with assets that are well under water, but they still need to keep them.