Monday, January 4, 2016
"Lien Stripping" - Still Available in Chapter 13
"Lien stripping" of underwater mortgages or other junior liens is still available under chapter 13 bankruptcy. The much publicized U.S. Supreme Court ruling in the Bank of America cases only held that lien stripping cannot be done in chapter 7 bankrupty cases.
In order to "strip" (ie. avoid) a second priority mortgage or other junior lien, they must generally be wholly underwater unless the obligation's had already ballooned.
The lien stripping is accomplished with the appropriate provision in the chapter 13 debtor's proposed chapter 13 plan. The applicable valuation and avoidance motion are also filed. Pursuant to a lien strip, a lien is avoided and the debt is provided for as a general unsecured claim.