Lien Stripping in Chapter 13 Bankruptcy

A mortgage is a loan that is protected from default through attachment to real property such as your home. The thing that attaches the mortgage loan to your house is called a lien. The home is security for the mortgage loan and as a result the loan is a secured debt. But not all mortgages are completely secured. Sometimes creditors are wholly secured by the property, meaning that the asset is worth more than the debt.

Sometimes creditors are undersecured, meaning that the asset is worth less than the debt. This is a bad situation to be in because the creditor will lose money if the debtor defaults on the loan. But there is a worse situation for a creditor. Creditors that have second or third mortgages are sometimes completely unsecured. Being unsecured means that if the debtor defaults and the home is foreclosed, the money available from the sale of property will not exceed the first mortgage and the second and third mortgagor will be left with nothing.

In Texas this is a very uncommon situation. There are laws in place that require that the debtor have a certain amount of equity in the property before a second mortgage can be attached to the home. In addition, home values have remained fairly stable in Texas. However, if a mortgage lender is completely unsecured and the debtor files Chapter 13 bankruptcy, they may find that their lien is stripped from the property. In Chapter 13 bankruptcy debtors can remove liens from real property if the debt is wholly unsecured. This process leaves the lender with an unsecured debt which may or may not be paid in the Chapter 13 plan.