What is a lien strip?

What is a lien strip?

The term “lien strip” is used by bankruptcy practitioners to refer to several different aspects. In this article, we are talking about removal of junior deeds of trust that are “underwater”, i.e, the amount of any senior liens exceed the fair market value of the real property. The process by which this is accomplished is formally known as a “Motion to Value Security” and is based upon 11 U.S.C. §506.

To be able to strip a junior lien on a primary residence, the junior lien must be completely out of money. If there is any value to secure any portion of the junior lien, then lien stripping is not available. For example, let’s say that the value of the Debtor’s residence as reflected in the bankruptcy papers filed by Debtor is $450,000. The lender holding the first position deed of trust is owed $500,000. The lender holding the second position deed of trust has a claim in the amount of $100,000. In this scenario, upon a proper showing, the Debtor will be able to obtain a lien strip order regarding the second deed of trust. Although, if we change the foregoing hypothetical by placing the value of the residence at $525,000, the result would be different. The second deed of trust is now secured by $25,000 of value. Although this amount is less than the full amount of the claim, it is enough to defeat a motion to strip the junior lien.

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