What is ‘lien stripping’ and how can it help?

On Behalf of | Mar 29, 2021 | Chapter 13 |

Many people living on Long Island, in Brooklyn or in other parts of New York City and the surrounding areas may have a second or third mortgage on their homes.

New Yorkers take out these mortgages for a number of reasons. Sometimes, they are part of a plan to consolidate other debts into one loan with a lower interest rate.

In other cases, a family might need the second mortgage in order to pay for major but necessary improvements to a home.

There is nothing wrong with taking out these mortgages, and they may even save a family money in the long run.

However, if a family falls into financial hardship, they may have to be put on the backburner for repayment. Unfortunately, like any other mortgage, a lender may elect to foreclose.

Lien stripping can help a family with negative equity in their home

Lien stripping, which generally is available in Chapter 13 bankruptcy, is the common name for a process through which a family can convert a secured second or third mortgage, which can be foreclosed on, into an unsecured debt, like a credit card.

Lien stripping offers several advantages to a debtor. For one, it prevents the bank holding a second mortgage from foreclosing.

Moreover, since the debt will be treated as unsecured, the debtor may be able to discharge it at the end of a Chapter 13 repayment plan even if the debtor only pays pennies on the dollar.

Generally speaking, lien stripping is available when a family is upside down on their home. In other words, a New York family may want to explore lien stripping if they owe $1 million on a home that is worth $800,000.

Whether lien stripping is a viable option depends on a debtor’s individual situation. He or she therefore should speak with an experienced bankruptcy attorney about it.