Lienstripping is a process in bankruptcy whereby junior lienholders are stripped, or removed from being a secured debt against the property. It applies only in Chapter 13 bankruptcy cases and only to the debtor's primary residence. Lienstripping does not apply to rental properties or second homes.
In order to qualify for a lien strip in Chapter 13, debtors must show that the current value of their property is worth less than what is owed on the first, such that the junior lien is essentially unsecured debt. For example, a debtor who has a home worth $500k with a first mortgage of $510k and a second mortgage or equity line of $90k would meet the requirements to have the lien stripped.
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On the contrary, the same debtor would not be eligible for lienstripping if he owed $499k on his first, because there is still $1k of security to which the second or equity line attaches to. The current real estate climate being what it is, most individuals who purchased a home between late 2003 and 2007 would be eligible for a lien strip.
Once it is determined that a debtor is a candidate for lienstripping, a motion is prepared and filed with the court. Creditors have an opportunity to object if they feel there is some security to the loan to be stripped, so it is important to come to the table with solid evidence. It is recommended that a formal appraisal be done on the property because that is the best evidence of value.
Once the judge enters an order allowing the lien to be stripped, the debtors no longer have to make monthly payments to their second mortgage and the debt is treated as an unsecured debt that is ultimately eliminated in the bankruptcy upon entry of discharge.
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