Definition

• Lien stripping in a bankruptcy is simply the removal of debts held by the person or business filing for bankruptcy when the value has sunk below the amount of debt. This is most commonly applied to outstanding loans for vehicles and mortgages, where the value of debt associated with the loan has exceeded the current value of the vehicle or property.
  
  Section 506 of the United States bankruptcy code outlines how, once someone files for bankruptcy, they are only responsible for paying the debt on the value of their assets. Any claim or loan that exceeds that value is considered unsecure and can be stripped.
  
  

Bankruptcy Filings

• The act of lien stripping is only available in Chapter 11 and Chapter 13 bankruptcy filings. A Chapter 11 filing is commonly known as "corporate bankruptcy," though it is available to individuals. This filing is considered a rehabilitation or reorganization through a debt payment plan and is used by businesses to continue operating as it reorganizes through a bankruptcy.
  
  The Chapter 13 filing, known as a wage earner bankruptcy, is a rehabilitation plan for individuals with a regular source of income to pay off their debts through a payment plan.
  
  

Mortgage Lien Stripping

• For mortgages, a person can stripping a second mortgage off of their bankruptcy if the value of the house does not exceed the value of the first mortgage. For example, if you have a first mortgage for $250,000 and a second mortgage for $40,000, yet your house is valued at $240,000, you may strip the second mortgage from your bankruptcy proceedings and not be required to pay off that debt.
  
  However, in that example, if your house is worth $251,000, you cannot strip a second mortgage. With mortgage lien stripping, it is basically an all-or-nothing strip as you can strip a portion of a mortgage, though the United States government and Congress have been investigating and debating possible changes to this section of the bankruptcy code.
  
  

Auto Lien Stripping

• For motor vehicles, a person filing a Chapter 11 or Chapter 13 bankruptcy can strip a portion of an auto loan. If you have a $12,000 loan on a vehicle now worth $10,000, you are considered to have a $10,000 secured claim and a $2,000 unsecured claim. In essence, you are not required to pay the $2,000 in value that your vehicle has lost. It is unlike the lien stripping for a mortgage in that you can reduce a portion of the loan as most people only have one loan on their motor vehicle.
  
  

When It's Not Allowed

• Tax liens can be stripped in reorganization filings such as Chapter 11 or Chapter 13 proceedings only if the liens do not attach to equity. The only liens that can be stripped are outstanding liens for value that is no longer present, such as a devalued home or car.
  
  Because of this, lien stripping is not allowed in other forms of bankruptcy where the person or business where there is a liquidation of assets because the liens are part of the outstanding debt and there is no debt payment plan to rectify them.