Due to the decline in housing prices in a rarely used bankruptcy technique has begun to get additional use. The process of “lien stripping’’ involves a homeowner filing under Chapter 13 (“payback plan”) asking the Bankruptcy Court to turn a secured second mortgage into a unsecured debt. This would eliminate monthly payments on the second mortgage and the second mortgage gets the same treatment as all of the other unsecured debt (i.e. credit cards, medical bills etc.).
This is only allowed if the homeowner is in a Chapter 13 bankruptcy and if the fair market value of their house is less than the amount they owe on their first mortgage. Mortgage companies have already begun to contest this practice and it has been prevented by a judge in Minnesota however for the time being it has been allowed by most Bankruptcy Courts.