Lien Strip

If your home has a second mortgage, especially if the loan value is underwater, then you may need to consider a lien strip as part of the bankruptcy filing. Lien strip is not available in a Chapter 7 bankruptcy, and while it is available in Chapter 11, the most common way for Arizona residents to address a lien strip is with individual Chapter 13 bankruptcy.

The status of a lien makes a big difference in the Arizona bankruptcy process. Lien status can be: fully or partially secured, or completely unsecured.

Lien strip – or stripping a lien – means to have a lien removed from title making the debt completely unsecured. A lien strip in bankruptcy often happens with a second mortgage on a home whose value has dropped below the amount owed on a first mortgage (the mortgage is underwater).

When completing a Chapter 13 bankruptcy repayment plan, some secured debts are paid off first and unsecured debts are delayed. Sometimes unsecured debts, such as credit card balances or second mortgages (subject to a lien), are paid off in fractions over time and possibly paid at less than the outstanding balance. Having a lien stripped in Chapter 13 bankruptcy can amount to a significant difference in the long term future for a home owner.

Since a lien strip is not available in a Chapter 7 bankruptcy filing, Chapter 13 bankruptcy is the most common filing for an AZ resident that requires a lien strip. If you file for Chapter 7 bankruptcy but later need a lien strip, a subsequent Chapter 13 bankruptcy filing can be made. But since these subsequent filings can be complicated, an experienced bankruptcy lawyer should be consulted.

If properly excised, the stripped lien will be removed from the property records once the Chapter 13 payment plan has ended. As lien stripping is a complicated process with many variables, it is a good idea to consult with an experienced bankruptcy law firm.