If I told you that you could completely wipe out your 2nd mortgage against your home in a bankruptcy case and save yourself those monthly payments while increasing the equity in your property, would that be of interest to you?
Lien Stripping in Chapter 13 or Chapter 11
This is known as “lien-stripping.”
Here is how it works: If the fair market value of your home (established by an appraisal or other valid evidence) is less than the amount owed on your first mortgage, you can lien strip (remove) the junior liens on the property.
This is also erroneously referred to as “avoiding” the mortgage lien in bankruptcy, but the term “avoid” in bankruptcy is usually used in connection with judgment liens (involuntary/non-consensual liens) against your property, which can also be removed, but under different circumstances.
You May Not Have to Pay Anything on the Removed Lien
What does this really mean? If successful, it means that the debt you owe on any such junior liens will be discharged if you complete your Chapter 13 payment plan, which lasts for 36-60 months.
How much your plan payments would be depends on a number of factors, primarily your disposable monthly income as well as how much priority debts (such as taxes, or mortgage arrearages to senior mortgages) exist which must be paid through your plan.
Thus you could end up paying as little as zero percent of your remaining junior mortgage balance in return for a discharge of that debt and removal of the lien from your property.
Pretty good deal, right?
Procedure for Mortgage Lien Stripping in Chapter 13 or Chapter 11
Lien stripping requires the filing of a Motion with the bankruptcy court (known here in the Los Angeles area as a LAM Motion) during the Chapter 13 or 11 case.
It may also, depending on the judge in the case, require an additional “adversary proceeding” to remove the lien.
Schedule a consultation with a qualified bankruptcy attorney if you want to explore the opportunity of eliminating your junior mortgage liens. It can be a great way to create future equity in your property while lowering your current monthly payments.