Homeowners may be able to eliminate a second or third mortgage through Chapter 13 bankruptcy. This is possible because of lien stripping. If your mortgage surpasses the current value of your house, then lien stripping can basically transform a second mortgage into unsecured debt for the bankruptcy process. Secured debt is when a lender can go after your property to satisfy a debt. If a secured debt is a first mortgage, then the lender can foreclose on your home. Credit cards are a type of unsecured debt, debt that is not backed up by assets. In order to get a lien strip, a junior mortgage has to be wholly unsecured. A second mortgage would be wholly unsecured when there is not enough equity in your home to cover this mortgage.

Here is how a lien strip works with a second (or third) mortgage. Let's say that you have three mortgages on your house. If the value of your home is now less than your first mortgage, then a lien strip would get rid of both your second and third mortgages. Now if your home is worth more than your first mortgage, but less than the first and second mortgage combined, then you can only eliminate the third mortgage. The principle illustrated in these examples is that junior liens can be stripped if the senior lien(s) are worth more than market value of a home. The debt that your equity cannot cover will be treated as the unsecured debt that it is.

A stripped junior lien becomes a non-priority unsecured in your bankruptcy. This means that you only have to pay off some of this debt, and the remaining portion of the debt gets discharged. Your second mortgage will only be gone for good if you finish Chapter 13 bankruptcy. If the case gets dismissed before you get the discharge, then you will still have a junior mortgage lien on your property.

Now Chapter 13 bankruptcy allows you to restructure your debt so that you can pay off a significant portion of it. Chapter 7 often provides a quick discharge of unsecured debt; lien stripping is almost never possible with this type of bankruptcy. But a resident of Alabama, Florida, or Georgia may have to the opportunity to discharge a junior mortgage. This option is available because of decisions handed down by the Eleventh Circuit Court of Appeals. But these decisions are not binding; it will still be up to a judge to decide whether or not you can strip liens in your Chapter 7 bankruptcy. If you talk with a local bankruptcy attorney, you can find out whether a court in your area is likely to grant you a lien strip.

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