There is a unique option available to Chapter 13 bankruptcy debtors who are homeowners. Known as “lien stripping,” this tool allows them to eliminate any junior or second mortgages on realty if the property is “underwater,” meaning that the property has diminished in value to the extent that any junior mortgage no longer has any equity to attach as security.
Lien stripping eliminates a second mortgage and converts it to unsecured debt, such as a credit card, by ordering the secured party to remove its lien from the property. Even a third mortgage may be eliminated by lien stripping provided that the amount of the senior liens on the property exceeds the home’s market value.
For example: If a house is worth $300,000 with a $350,000 first mortgage and a $50,000 second mortgage, the lien may be stripped because the first mortgage is greater than the value of the house. Also, if there was a third mortgage worth $35,000, then this lien could also be stripped. However, if the house instead is worth $375,000, then equity exists above the first mortgage, so the second mortgage may not be stripped. But since the combined balance of the first and second mortgages is $400,000, which is is greater than $375,000, then the third mortgage may be stripped.
The benefit of this is that once debtors file a Chapter 13 bankruptcy case, they will not be legally required to pay their second mortgage. However, any stripped underwater mortgage will not be released until the Chapter 13 plan has been completed, and the debtor receives a discharge. If the case gets dismissed before completion of the Chapter 13 bankruptcy plan, any second (or third) mortgage lien will not be stripped.
The Morrison Law Group strives to achieve complete client satisfaction with the services we provide over the course of a bankruptcy case, as well as the ongoing services that we provide post-bankruptcy. Not all Utah Bankruptcy attorneys can make this statement, but the Morrison Law Group is not like other Utah bankruptcy law firms. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.