Legal Definitions - lien-stripping

Definition: Lien-stripping is a practice in bankruptcy where a mortgagee's secured claim is divided into secured and unsecured components. The claim is then reduced to the market value of the debtor's residence, allowing the debtor to modify the mortgage terms and reduce the debt amount.

For example, if a debtor owes $200,000 on a mortgage for a home that is now worth $150,000, lien-stripping would split the claim into a secured portion of $150,000 and an unsecured portion of $50,000. The unsecured portion can be discharged in bankruptcy, and the debtor can modify the mortgage terms on the remaining secured portion.

However, the U.S. Supreme Court has prohibited lien-stripping in all Chapter 7 cases and in Chapter 13 cases involving a debtor's principal residence. The Bankruptcy Reform Act of 1994 also modified the Bankruptcy Code to prohibit lien-stripping in Chapter 11 cases involving an individual's principal residence.

These examples illustrate how lien-stripping works and the limitations on its use in bankruptcy cases.