Lien Stripping

A phrase sometimes used to describe the act of converting what was a secured claim prepetition to an unsecured claim postpetition, when the secured portion of the creditor’s claim is valueless. The secured creditor who holds a second lien position on property worth $1 million – when the holder of the first lien is indisputably owed $5 million – is the holder of a valueless second lien, and may be found in a bankruptcy case to be the holder of an unsecured claim in the amount of $1 million, in which case his lien will have been effectively “stripped” from him. Lien stripping is not viable in Chapter 7 cases, an issue that divided courts until it was resolved by the United States Supreme Court decision in Dewsnup in 1992. In Chapters 11 and 13, a debtor may modify the rights of its secured creditors, except for the rights of a secured creditor whose debt is secured only by the debtor’s residence.

Bankruptcy Code §§ 502, 506, 1322(b).

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