"Lien strip" has become a very popular bankruptcy term over the past 5 years or so – largely due to the dramatic decline in the value of real estate. Here's how it works: say you happen to own a home with a first mortgage with a balance of approximately $150,000. Say you also have a second mortgage or home equity loan with a balance of approximately $30,000 - that was taken out in 2004 when the appraised value of the home was approximately $195,000. Fast forward to today where that same house is now worth only $140,000. This would mean that the second mortgage is now technically "unsecured" – as there is no equity over and above what is owed on the first mortgage to secure it.
In a Chapter 13 proceeding (NOTE: you cannot validly strip a second mortgage lien in a Chapter 7 case), you can seek to strip the second mortgage lien in this scenario and then treat it like a general unsecured debt. This can prove to be extremely useful because in most Chapter 13 cases, unsecured creditors may only be required to receive a few pennies on the dollar. Assuming you complete the Chapter 13 case successfully, the unpaid unsecured debt is discharged – and you then own the home subject only to the first mortgage.
Over the past 5 years, I've had plenty of clients who elected to file a Chapter 13 - even though they qualified for relief under Chapter 7 – just so they could strip a second mortgage lien.
Although lien stripping has become more prevalent over the last 5 years, not every bankruptcy attorney knows how to do it successfully. In the Eastern District of Michigan, the local rules require an Adversary Complaint (i.e. a lawsuit within the bankruptcy case) to be filed in order to strip a lien. If you believe that you may be in a position to attempt to strip a second (or even a third) mortgage lien, be certain to consult an experienced bankruptcy attorney who is familiar with the lien stripping process – one who knows the rules and has perhaps even litigated some lien strip cases.