Difference between avoiding a lien and stripping a lien

There is a difference between avoiding a lien under 11 U.S.C. section 522(f) and treating a secured claim as wholly or partially unsecured based on a valuation of the collateral (“lien stripping”).

Avoiding a Lien [11 U.S.C. § 522(f)]

A debtor may avoid a lien:

  • to the extent the lien impairs an exemption;
  • and only if the lien is (1) a judicial lien or (2) a nonpossessory, nonpurchase-money security interest in household goods and other property described in 522(f)(1)(B).

Section 522(f)(2) sets forth the arithmetic formula for determining whether a lien impairs an exemption and can be avoided. The judgment lien does not necessarily have to be junior to all other non-avoidable liens.

A debtor must notice and file a motion and get an order avoiding the lien.

If it’s a judgment lien to be avoided, the motion must identify not only the creditor, but the filing date, county, book and page number of the judgment lien as well (which should make it easier to get the lien released after the debtor gets a discharge).

Lien Stripping [11 U.S.C. § 506]

The Code does not refer to cramdown, strip down, strip off, lien-stripping, or any other familiar terminology, but these terms generally refer to the process of valuing the collateral under 11 U.S.C. § 506 to determine the amount of the creditor’s secured claim.

An allowed claim is secured only to the extent of the value of the property to which the lien attaches; the remainder of the claim is considered unsecured.  If there is a junior lien that is “underwater” – it is entirely unsecured.

For example, property worth $100,000 is encumbered by a 1st mortgage in the amount of $120,000 and a 2nd mortgage of $10,000.  There is no value in the property to which the 2nd mortgage can attach.  It is a wholly unsecured claim under § 506(a).

Treating the claim as unsecured in the plan does not necessarily get the lien released at the conclusion of the case.  A well-crafted plan or motion will contain language in the Special Provisions section that requires the creditor to file a release of its lien within x days after the debtor’s discharge is entered.


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