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Dec. 14, 2008
Copyright © Las Vegas Review-Journal

Strapped? Maybe lien strip will help

Upside-down owners may use process to shed extra mortgages

By HUBBLE SMITH
LAS VEGAS REVIEW-JOURNAL

Las Vegas attorney Dorothy Bunce has a possible solution for homeowners who are upside down on their home, owing more than it's worth.

It's called "lien stripping," a legal process of eliminating second and third mortgages and home equity lines of credit on homes that have depreciated in value.

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    • Lien stripping gives homeowners the opportunity to sell or refinance and, in many cases, helps prevent them from losing their homes to foreclosure, Bunce said.

    Creditors no longer have the right to foreclose if payment is not made. The debt itself can be eliminated as part of Chapter 13 bankruptcy.

    "It's the bailout for the rest of us," said Bunce, who launched a Web site, www.lienstripping.com, to provide information on the process.

    Not everyone will qualify for lien stripping and only under certain circumstances would anyone benefit from the move.

    "You have to owe more on the first mortgage than the property is worth. That gets you in the door," Bunce said. "If you can save $50,000 to $200,000, it's worth it. For the most part, people I see are in trouble in every way. They owe $20,000 or more on credit cards and they're a couple months behind on their mortgage."

    It won't help on a $10,000 second mortgage and it won't help somebody who can't make the payment on their first mortgage, she said. Also, people want to strip the first mortgage and that won't happen.

    Lien stripping is primarily a consumer bankruptcy issue, Bill Curran of Las Vegas law firm Ballard Spahr Andrews & Ingersoll said.

    "It's a way to exonerate some debt on a property and allows you to get a fresh start," he said. "I'm told you can do this on cars as well."

    As an example, someone has a $100,000 first mortgage on a house and takes out a second mortgage for $50,000. If the value of the home drops below $100,000, the second mortgage becomes a lien on nothing, Curran said, because the property's value is covered by the first mortgage. The lender on the second mortgage then becomes an unsecured creditor.

    Chapter 13 bankruptcy fees typically run around $4,000, Bunce said. Liens removed from the home may have to be paid back as part of a bankruptcy plan, depending on the person's income.

    Homeowners don't have to fall behind on payments to be eligible for lien-stripping. They must prove to the court that they have steady income and can make the first mortgage payment.

    "Otherwise, it's not going to fly. You don't have to show you're going to make the second mortgage because you're not going to," Bunce said. "If there isn't any equity in the property being financed, the court is going to recognize reality and not fiction and say the loan isn't secured if there's nothing to secure it."

    Bob Olson of Greenberg Taurig said he sees no disadvantages to lien stripping.

    "If the house ever goes up in value, you have equity if you complete the plan," he said.

    Consumers must complete Chapter 13 bankruptcy. Depending on how much disposable income is paid to the trustee, there may be substantial payments distributed to unsecured creditors or there may be no payments to unsecured creditors, Olson said.

    Some homeowners are turning to short sales, or selling at less than the balance owed on the home, which must be approved by the lender.

    However, most homeowners are unaware of the serious tax repercussions that occur after a short sale, Bunce said. The Internal Revenue Service counts the difference as earned income. Also, instead of having to move, people can keep their home without the tax liability.

    Lien stripping is only available to individuals, not corporations, limited liability companies and trusts.

    It's not available to people whose first mortgages exceed $1 million. Investors and "fat cats" can't take advantage of lien striping, though they'd like to, Bunce said.

    Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.

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    Free Nevada Meat Tokens wrote on December 14, 2008 09:57 PM: You can't lose money on the house you live in unless your income earning takes you to an area too far away to commute from your home.

    You can't lose money on the house you live in unless your income earning takes you to an area too far away to commute from your home.

    You can't lose money on the...


    zippy wrote on December 14, 2008 06:33 PM: This will never take hold. But people will try. Short sales, that's another story. I see short sales work all the time. You have to get approval, but now days, that is easier because banks just DO NOT want those houses back.
    However, a short sale will still hurt your credit for up to 2 years. Where a BK will hurt your credit FOREVER. Not just 7 years.


    NV CPA wrote on December 14, 2008 04:35 PM: Two quick tax clarifications:
    1. J Boogie: A second mortgage would generally not be eligible for debt relief under the Mortgage Debt Relief Act of 2007 unless it was used to improve the property (pool, addition) and not for vacation, college, car.
    2. Axman: While the gain on the house would generally be tax exempt, the income from debt relief would generally be taxable. Also, it would be at ordinary income rates, not capital gains rates.


    Axman wrote on December 14, 2008 01:20 PM: I agree with all the posts below! I have seen many bankruptcy stays LIFTED when the payment plans are not met. Why would they be met when they could not be met before? duh LOL!

    I saw how bankruptcy just added MORE expense and MORE complexity that in the end did NOTHING for the homeowner, just added grief, delay and expense. In otherwords, it DID NOT WORK!

    LienStipping is a just a sexy phrase for Bankruptcy.

    Aside from the Debt Relief Act, a CPA recently pointed out to me that on the sale of a Personal Residence, the gain is TAX EXEMPT. This is a standard exemption from income! The bankruptcy lawyer in the article did not mention that either. So a short sale would be best, IF IT IS APPROVED. Many are not.


    Leric Goodman wrote on December 14, 2008 12:48 PM: Lien stripping is an option, but not for everyone, and the consequences must be thought through carefully.

    Consequence 1: The world has changed. Now, and for as long as we can foresee the future, credit will be restricted and granted only to the most credit-worthy. If a consumer declares bankruptcy, what kind of credit will be extended to them? They can expect not to be granted to buy a car, improve the house, buy clothes. Anything they want to buy they will have to save up the money for and wait until they pay cash.

    Consequence No. 2: Taxes. Forgiveness of debt is considered income under the internal revenue code. So you strip the liens and discharge the debt in bankruptcy only to pay income tax on the big hunks of money you just "saved"?

    It might make sense for some people and those people should do it if they've carefully thought through all of the risks and benefits beforehand.


    InTheKnow wrote on December 14, 2008 10:12 AM: There is a new Real Estate scam that is now starting to proliferate in Las vegas. Houses are being listed "subject to short sell approval" for hundreds of thousands less than are owed, with no intention of selling to an outside party. That is the start, if you want to know how the scam works, who gets screwed, and the impact on other home values write me at shortsellscam@aol.com for a more complete explanation. I don't want to publicize this too much until either someone will report on it or the Feds will step in to stop it. ALL homeowners, especially those that are legitimately trying to sell, get hurt by this.


    J Boogie wrote on December 14, 2008 09:03 AM: "However, most homeowners are unaware of the serious tax repercussions that occur after a short sale, Bunce said. The Internal Revenue Service counts the difference as earned income."

    Perhaps attorney Dorothy Bunce should familiarize herself better with the Mortgage debt relief act of 2007 (HR 3648) before she preaches to the press?

    Be careful with the money hungry-all knowing" attorneys people!

    BTW, this strategy has been called the back door cram down by other attorneys until Ms. Bunce came up with "lien stripping.com"

    what a joke.


    J Boogie wrote on December 14, 2008 09:03 AM: "However, most homeowners are unaware of the serious tax repercussions that occur after a short sale, Bunce said. The Internal Revenue Service counts the difference as earned income."



    Perhaps attorney Dorothy Bunce should familiarize herself better with the Mortgage debt relief act of 2007 (HR 3648) before she preaches to the press?



    Be careful with the money hungry-all knowing" attorneys people!



    BTW, this strategy has been called the back door cram down by other attorneys until Ms. Bunce came up with "lien stripping.com"



    what a joke.


    J Boogie wrote on December 14, 2008 09:03 AM: "However, most homeowners are unaware of the serious tax repercussions that occur after a short sale, Bunce said. The Internal Revenue Service counts the difference as earned income."

    Perhaps attorney Dorothy Bunce should familiarize herself better with the Mortgage debt relief act of 2007 (HR 3648) before she preaches to the press?

    Be careful with the money hungry-all knowing" attorneys people!

    BTW, this strategy has been called the back door cram down by other attorneys until Ms. Bunce came up with "lien stripping.com"

    what a joke.


    TM wrote on December 14, 2008 08:31 AM: This is another gratifying job of helping someone who took on excessive debt, to enjoy the benefit of the money and then to shirk the responsibility of having to pay for it.


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