Chapter 13 bankruptcies deliver many benefits to debtors. By electing to be in a voluntary plan, the debtor receives more rights than in, say, a Chapter 7 case. One of these rights is the ability to strip away wholly unsecured mortgages.
Many properties have more than one mortgage or secured loan against the property. These secured loans are ranked in a priority, depending on when they were recorded. Properties only have so much equity. That is, if the value of the property is greater than the lien(s) against the property, the property is said to have equity. Sometimes, a second or even a third lien on property has no equity in which it can attach. This is a situation where the lien is completely unsecured. In a Chapter 13 bankruptcy, this wholly unsecured lien can be stripped away from the property and treated as a general unsecured debt. Lien stripping allows you to get rid of the “wholly unsecured” liens on your property.
Suppose you own a house worth $150,000 and you have a $160,000 first mortgage. In this situation, you have no equity in the house, because the loan is greater than the fair market value of the house. Now suppose you had a second mortgage (or line of credit, or other judgment lien) against the house. This second lien could be stripped away from the property and treated as an unsecured debt in a Chapter 13 (or Chapter 11 case).
The stripped liens will receive the same treatment as your other unsecured debts (such as credit cards, medical bills, payday loans, etc.) in your bankruptcy. In many or most Chapter 13 cases, the unsecured creditors get very little, if anything. So, the end result is that at the conclusion of the Chapter 13 case, the lien go away and the lender will be required to remove it.