Discharge of Second Mortgages in Bankruptcy

An Explanation Of The Mechanisms Of Lien Stripping

By Jay Weller

One tool used by knowledgeable Bankruptcy Attorneys is a process called Lien Stripping. Lien Stripping in Bankruptcy permits the Bankruptcy Attorney, on his Client’s behalf, to eliminate or Discharge Second and Lesser Mortgages, meaning other than the First Mortgage.

In order to Lien Strip a Second Mortgage, the Fair Market Value of the Debtor’s Homestead must be less than the Balance of the First Mortgage. In such a circumstance, the result is that the Second or even Third Mortgage is considered, according to Bankruptcy Law, to be wholly Unsecured.

Lien Stripping is only available as an option under Bankruptcy Law if the Property is the Debtor’s Homestead. The Bankruptcy Attorney cannot Strip the Lien on a Rental Property or a Non Homestead Property.

For example, a Debtor owns a Homestead in the State of Florida where the Fair Market Value of the Homestead is $100,000. The Debtor has a First Mortgage on same Homestead with a Balance of $120,000, and a Second Mortgage with a Balance of $25,000. In this example, the Bankruptcy Attorney can Lien Strip the Second Mortgage because, the Balance of the First Mortgage is greater than the Fair Market Value of the Homestead. If performed correctly, the Second Mortgage will be Discharged in the Bankruptcy, meaning there is no longer a Second Mortgage encumbering the Homestead.

In the second example, the Debtor owns a Homestead with a Fair Market Value of $100,000 and the Balance of the First Mortgage is $80,000. The Bankruptcy Attorney cannot Lien Strip or Discharge the Second Mortgage because the Balance of the First Mortgage is less than the Fair Market Value of the Homestead.

Thank you for reading our Article on Lien Stripping. If you or any of you friends, family or Clients need to file Bankruptcy or need assistance in Matters of Debt, please Contact or Call our Main Office at 727-539-7701 or Toll Free at 1-800-407-3328. The Bankruptcy Attorneys, Jay Weller or Will Brumby, will be happy to assist you in any way possible.