The bankruptcy court may strip a creditor's lien on a property as part of the bankruptcy process if it is from an unsecured debt. Second mortgages often become unsecured debt as part of Chapter 13 bankruptcy proceedings in cases where the property has very little or no equity. Chapter 7 bankruptcy usually leaves them as secured debt, preventing the debtor from avoiding foreclosure due to a default on a second mortgage.
After having the court strip the lien from the second mortgage, the debtor can ask that the creditor return any promissory note or deed of trust associated with the property. Once the court strips the lien that the creditor has on the property, the creditor can no longer foreclose on it. The court can address a lien during Chapter 7 bankruptcy filings, but it cannot strip the lien.
Many people struggling with debt consider bankruptcy as a way to get rid of old debts and avoid foreclosure. Lien stripping is simply another step that a debtor can take during the process to prevent foreclosure by the creditor that holds the second mortgage.
Every case is unique, and the court makes the final determination on whether it strips the lien or leaves it in place based on multiple factors. Lien stripping can be a confusing concept in some cases, but a debtor's attorney may be able to explain how it works and what the court requires. Bankruptcy attorneys may handle all of the lien stripping steps for their clients because creditors may be reluctant to cooperate with the debtors' requests. The attorney could then assist the debtor with requesting and executing the action.
Source: SF Gate, "How to Strip Away a Second Mortgage Through a Bankruptcy", Tony Guerra, December 02, 2014