It is becoming quite frequent for new clients to call me and ask me if they can do a "lien strip." Just what exactly does it mean to do a lien strip? A lien strip, or a loan strip, refers to the legal process of stripping off (removing) a 2nd mortgage or home equity loan that is encumbering your home. A lien strip is accomplished by using the Chapter 13 bankruptcy lienstripping process to convert a secured 2nd mortgage or home equity loan into unsecured debt and essentially treat it just like credit card debt in your Chapter 13 bankruptcy case. Removing the lien or encumbrance against your home is referred to in San Diego bankruptcy cases as “stripping” the lien.
Lien Stripping or Loan Stripping of Home Equity Loan
To perform a lien strip on your home, your bankruptcy lawyer will file a special motion with the San Diego bankruptcy court in order to that the value of your property is less than the balance owed on your 1st mortgage loan, thereby rendering your 2nd loan an unsecured loan under San Diego bankruptcy law because there is no equity securing it. The special motion also asks the Court to actually modify and convert the 2nd loan or home equity loan into unsecured debt so that effectively it is treated just like credit card debt. Having converted your 2nd loan to unsecured status, we then ask the Court to “strip” (remove) your 2nd mortgage or home equity loan. Thus, through this whole process your bankruptcy attorney is able to erase a second mortgage that is encumbering your home, so that you are left with only your 1st position mortgage loan.
On many occasions I have spoken to clients that were misinformed that they could do a partial lienstrip and remove part of their 1st mortgage and bring the 1st mortgage balance down to the value of their property. To the novice practitioner, in theory, if you just read the black letter law, this would seem possible. But to the experienced San Diego bankruptcy attorney, he or she knows that there is San Diego bankruptcy case law providing that when you partially lienstrip a loan, then the new loan amount must be paid off during the course of your Chapter 13 bankruptcy. So, for example, if you wanted to do a partial lienstrip of your 1st mortgage balance from $600,000 down to $500,000 based upon a $500,000 value of your property, you would have to pay off the new $500,000 loan balance within 5 years. That would translate into payments of about $10,000 per month for 5 years. If you were paying the $600,000 loan over 360 months, your payments would be about $4,000 per month. Partial lienstrip just doesn't work.
Lien Stripping on Rental Property
While in theory lien stripping on a rental property is permissible, in reality lien stripping on a rental property rarely works. There are several reasons for this, but the main reason is that most rental properties will still remain cash flow negative if you do a lienstrip, and the San Diego bankruptcy trustees will typically object to you being able to keep a cash flow negative property. The San Diego bankruptcy court will support the trustee and expect you to let go of the cash flow negative property and take whatever money you save (the amount that you were cash flow negative) and pay that money each month to your creditors in your Chapter 13 bankruptcy. Even if you could make the rental property cash flow positive, you would most certainly have to pay all of the positive cash flow to the bankruptcy trustee so that the money could be used to pay your creditors.
If you have been looking into your mortgage debt relief options, you may have heard of a loan strip. Loan stripping is simply another term for lien stripping. The more technical terminology used by lawyers is lien stripping. Because a lien strip results in eliminating a loan and the lien provided in security, a lien strip is sometimes referred to be nonlawyers as a loan strip and the process is sometimes referred to as loan stripping.
Talk to a Lien Stripping Expert
So now you know what all the lien stripping buzz is about. You know what works and what doesn’t work. If you have a 2nd mortgage or home equity loan against your home, you just may be able to do a lien strip and strip off the loan and lien encumbering your home through the Chapter 13 lienstripping process. Most importantly, if you are considering doing a lien strip on your home, talk to a lienstrip expert, that is, an experienced Chapter 13 bankruptcy lawyer who has lots of experience performing lien strips.