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One of the significant benefits that can be derived from a bankruptcy filing is the stripping
of liens. The best way to explain the concept of lien stripping is through an example.
So I put together a little example here using a property, a home that is worth $100,000.
Now there's a first mortgage of $120,000. There's a second mortgage of $80,000. So we
would say that this house this property is $100,000 underwater. You've got $100,000 more
debt than the value of the property.
We would call the first mortgage lien under secured mortgage because the amount of security
of the property is less than the amount that's owed. The second lien, the second mortgage
you can see, has no collateral at all. Because the property isn't even worth as much as is
owed to the first mortgage holder.
And the bankruptcy code says if a lien has no collateral then the lien is void. What
this means is that we then strip this second mortgage off of the property.
And the homeowner is left with one $120,000 mortgage. Now you would ask yourself what
happens to the second mortgage for $80,000?
The $80,000 debt is not automatically wiped out. What happens is the $80,000 debt is shifted
over here to this bucket of unsecured debt. So it goes into the bucket with credit cards,
hospital bills and things like that, debts for which there is no property as collateral.
And how that that is ultimately treated is depends upon the individual circumstances
of the client and whether or not they're in a Chapter 7 or Chapter 13 bankruptcy. But
in any event, what the homeowner is left with is a home that's much more economically sound
because we now only have one mortgage of $120,000 compared to a value of $100,000. So he's gone
from $100,000 underwater to $20,000 underwater so that is basically how lien stripping works.