Due to a decline in housing sales, Ken's home is now valued at $185,000. Due to a workplace accident, Ken had a loss of income and took out a second mortgage on his property to stay afloat financially for a few months. The first mortgage is $200,000, and the second mortgage is $25,000. What can Ken do to reduce the amount of the mortgages owed?

Question

Quizplus · Accepted Answer

Lien stripping is a process used in bankruptcy cases to remove junior liens, such as second or third mortgages, when the property value is less than the amount owed on the senior lien. Since Ken's home is valued at $185,000, which is less than the amount owed on the first mortgage ($200,000), he cannot lien strip the first mortgage because it is not fully unsecured; it is secured by the property's value. However, the second mortgage can be considered wholly unsecured because there is no equity left to secure it after accounting for the first mortgage. Therefore, Ken can potentially lien strip the second mortgage in a bankruptcy proceeding, effectively treating it as unsecured debt, which may be discharged, depending on the bankruptcy chapter filed.

Due to a Decline in Housing Sales, Ken's Home Is