Mortgage stripping is not well known outside of the bankruptcy community, but it is a highly useful mechanism that can help a debtor to keep her home without paying second mortgages or liens. When a second mortgage or other lien is wholly unsecured, bankruptcy law allows it to be stripped away and treated like an unsecured debt – like a credit card or medical bill – and paid pro rata with the other unsecured debt instead of being paid off in full. For most people in bankruptcy, this means that you can pay your second mortgage off for pennies on the dollar, provided that you meet certain qualifications.

Mortgage lien stripping is most often done in association with a foreclosure, but you don’t have to be in foreclosure or even in distress to take advantage of this remedy. You do have to file a Chapter 13 Bankruptcy, though, which means that you will have to submit a payment plan to repay part of your debts. The amount you pay varies but is tied to your disposable income – your ability to pay. Lien stripping is not available outside of bankruptcy or though the Chapter 7 liquidation process.

I believe that mortgage lien stripping is necessary more often than lots of people like to admit. Some people don’t want to file bankruptcy, or don’t want to deal with the problems they face. Perhaps it’s easier just to keep making the payments. And that’s fine. But I question whether you want to keep paying a first, and second, and sometimes third mortgage where you have no hope of paying it off and where there will be no value in it

for years, if ever. I don’t see a point in paying mortgages that are double what the house next door rents for when the homeowner isn’t gaining any equity and is stretches as far as she can go just to stay afloat. We can do better for you.

Some of my clients have told me that they “feel bad” about agreeing to pay and then not following through. I point out to them that they bank doesn’t feel bad when they kick up your interest rates. The bank doesn’t feel bad when it forecloses. And the bank doesn’t feel bad when they screw up so badly that the government has to bail them out. The bank even has an advantage over most consumers – knowledge – and were still knocked down

by our real estate bubble. If your lender is going to take advantage of all remedies at its disposal – and then additional remedies created after the fact for them by a pliant Congress – then, as I see it, so should you.

Remember, you can stop a foreclosure by filing bankruptcy at any time before the foreclosure sale – even after judgment is entered.

Mortgage lien stripping was seldom seen in bankruptcy before the economic downturn. This is because the mortgage(s) to be stripped must be “wholly unsecured.” For example, if you bought a house for $200,000 with 80/20 financing, you have a mortgage for about $160,000 and another for $40,000. If your property dropped in value to $150,000, your first mortgage is mostly secured but second mortgage is now wholly unsecured and can

be stripped. The second mortgage is secured on paper, but in practical terms the sale of the home would not pay a penny to the second mortgage, and as a result it is seen an unsecured in bankruptcy. In a market with accelerating home values, this neverhappened: in fact, one could simply sell the home at a higher price to the next seller, pay the mortgages, and profit. Obviously, this is not the case today.

Fortunately, that does not mean that all is lost. If you own real estate with a second or other mortgage or lien after your first, it may be possible to remove that lien in a Chapter 13 Bankruptcy Case. By doing so, you can change your mortgage payment from a sketchy proposition and questionable investment into the good investment you had always thought it would be.

There are also several other ways to avoid second mortgages in Bankruptcy. A debtor can strip a lien when:

• The second mortgage is wholly unsecured, which is the most common occurrence today and was discussed above;
• There is a balloon payment due on the mortgage during the life of the Chapter 13 case;
• The second mortgage is secured by other assets in addition to the house; or
• The property is not the “debtor’s principal residence.”

Generally speaking, debtors leave bankruptcy and the mortgage lien stripping process without a second mortgage, with their home, and with a more affordable mortgage payment. Of course, if you can’t afford your first mortgage payment by itself, you may still have a problem – you will probably want to consider surrendering your home and using the Chapter 7 liquidation process instead – but for a lot of debtors mortgage lien stripping can be highly useful and effective.

Instead of, or before, you decide to do nothing and just surrender your real estate back to your lender, consider discussing this option with an attorney who works with these issues. Doan Law Firm, your bankruptcy attorneys in Orange County, Riverside and Los Angeles Counties, offer a free 45 minute consultation and would be happy to assist you in these matters.