What is “Lien Stripping”?

Lien-stripping is the process of bifurcating (splitting) a secured claim into two separate claims, the secured portion and the unsecured portion. For instance, you have a home that is worth $500,000 and you have a first mortgage balance of $300,000 and a second mortgage balance of $300,000. Since the house is only worth $500,000 and the second mortgage is partially secured in the amount of $200,000 and partially unsecured in the amount of $100,000, the unsecured portion would be “stripped off” and treated as a general unsecured debt. Through a Chapter 13 you could split these claims into these two categories and you would be required to pay the secured portion the $500,000, but the unsecured portion could be paid anywhere between 0-100% depending on many other factors with the difference being discharged at the conclusion of your plan.

A similar process can be done with vehicles called a “cram down”.

 

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