Lien Stripping (Bankruptcy) Law and Legal Definition
Lien stripping refers to the splitting a mortgagee's secured claim into secured and unsecured components and reducing the claim to the market value of the debtor's residence, thereby allowing the debtor to modify the terms of the mortgage and reduce the amount of the debt.
This allows a person who owns a home with more than one mortgage, to completely remove or avoid the second and subsequent junior mortgages from home and county records, thus leaving only the first original mortgage. This generally requires objective evidence that the home is appraised for less than the value of the initial mortgage. For example, home is worth $300,000 and the first mortgage is for $200,000. A second mortgage (in certain states, a deed of trust) is for $100,000. Here the first lender is under secured by $100,000. The value of the property is less than the lien by $100,000. Again the second lender has nothing securing their lien. They are unsecured because the property has no value left over from the first lien.
The U.S. Supreme Court has prohibited lien-stripping in all Chapter 7 cases [Nobelman v. American Savs. Bank, 508 U.S. 324, 113 S.Ct. 2106 (1993)] and in Chapter 13 cases involving a debtor's principal residence [Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773 (1992)]. The Bankruptcy Reform Act of 1994 has modified the Bankruptcy Code to prohibit lien-stripping in Chapter 11 cases involving an individual's principal residence.
Lien stripping is a powerful tool that may save you a large sum of money when filing for bankruptcy.
This is also termed as Lien Cramdown.