Under section 506(a) of the Bankruptcy Code, a creditor holding a lien perfected under non-bankruptcy law against bankruptcy estate property, and which is not subject to avoidance, is entitled to retain that encumbrance.
However, where the value of the collateral is less than the amount the debtor owes, the debtor may elect to retain the collateral and be obligated to pay the creditor only that amount equaling the value of the estate's interest in the property.
This process is called "lien stripping” which reduces the lien to the value of the collateral to which it attaches and removes a wholly unsecured lien in its entirety. Thus, this allows a debtor to bifurcate a mortgage claim into secured and unsecured debt based on the value of the home so that the debtor will only have to pay the secured part of the claim. The code is clear that this is not permissible for homes that are the debtor’s principal residence.