Lien Stripping in Chapter 7 & Chapter 13

Lien stripping under Chapter 7 of the Bankruptcy Code is not permitted except for Judicial or judgment liens that impair the debtor’s exemptions. The United States Supreme Court ruled that chapter 7 debtors cannot strip a creditor’s claim down to the current value of the subject property in Dewsnup v. Timm, 502 U.S. 410 and ruled in Bank of Am., N.A. v. Caulkett, 192 L. Ed. 2d 52 that a chapter 7 debtor cannot strip a junior mortgage lien pursuant when the debt owed on a senior mortgage lien exceeds the present value of the property.   

Chapter 13 bankruptcy aims to help the debtor reorganize rather than liquidate and voluntary, judicial and statutory liens can be reduced to the value of the attached collateral. Thus, every kind of lien can be reduced to the value of the collateral to which it attaches. In California the  Chapter 13 debtor may “strip off” a wholly unsecured junior mortgage lien when the junior lien holder was properly served , the debtor satisfactorily completed the Chapter 13 plan and a final discharge order has been entered and the appeal period has run. So it is important that in a chapter 13 proceeding, when the value of the mortgage exceeds the present property value additional property liens that are wholly unsecured can be stripped if the above requirements are satisfied.