Strapped? Maybe lien strip will help

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.

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.