Lien stripping allows a Chapter 13 debtor to remove a junior mortgage secured against the debtor’s real property. Lien stripping does not apply to first mortgages. First mortgages on residential real estate cannot be modified. Lien stripping is available only for junior mortgages, which means any mortgage that is recorded after the prior (or “senior”) mortgage has been recorded. The most common examples are refinances and lines of credit.

To qualify for lien stripping, the value of the real property has to be less than the amount owing on the senior mortgage. This is generally referred to as being “upside down” on your mortgage. If the value of the property is less than the amount owed on the first mortgage, then a motion can be filed in the bankruptcy court to “strip off” the junior mortgage from the property. The junior must be “wholly” unsecured. If there is any equity available to cover any amount of the junior mortgage then it cannot be stripped.

Evidence must be provided to a bankruptcy court. A debtor should have some basis for valuation as of the date of the bankruptcy filing. A recent appraisal or a broker’s opinion of value can be used. If the lender challenges the valuation then the debtor would most likely have to get a full appraisal. In addition, the debtor would need to have proof of the petition date balances on the first and second mortgages along with copies of all relevant notes and deeds of trust.

Noticing the proper party is also keep. A court in the Northern District of California will not grant a lien strip motion if notice was defective. The proper party or holder of the deed of trust must be properly served. In many instances the deeds of trust are assigned so proper research is necessary to determine who actually owns the junior note and deed of trust.

Once a junior mortgage is stripped off, it is no longer a lien against the real property. All amounts owed on the junior mortgage become an unsecured claim in the Chapter 13. If the Chapter 13 is successfully completed, then the unpaid amount owed on the junior mortgage is discharged and never has to be paid. The mortgage company will then have to reconvey its deed of trust. Note that a debtor must complete the bankruptcy in order for the lien to properly stripped. In the Northern District of California the court first issues an order valuing the lien at zero and then when the debtor receive a discharge, the court will enter a final order voiding the lien.

Call David Arietta at (925) 472-8000 for a review of your situation.

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