BK, Foreclosure, And Lien Payoff
I recently met with a homeowner who is in quite a pickle. His property is worth about $250k, he owes about $200k but he's got $500k in leins on the property. He's declared Chapter 13 and is in the process of paying the trustee and he continues to make his house payments to stop it from going into foreclosure.
Basically the payments are eating this guy alive and he wants out of the house, but cannot sell due to the $500k in leins.
Now to my best knowledge, the only way to get rid of these leins on the property are to :
1. pay them off (either in full or at a discount)
2. if the property is foreclosed upon, the liens are removed from the property (but can still follow the owner around).
This guy is wondering if he declares Chapter 7, will the leins be wiped out. What consequences would this have with regards to his property.
Thanks for your time,
Ryan J. Schnabel
If this guy is already in Ch. 13, he should consult his attorney who handles that case on implication sof Ch. 7. There's not enough information about what type of liens encumber the title on his property. For example, IRS liens won't go away with Ch. 7, as far as I know. Plus the lender will still foreclose on his house because Ch. 7 is liquidation. If he just has a lot of debt that's non government/tax-related, Ch. 7 is the best way for him to start over. You can spend all the time negotiating with the lienholders, but with 500k liens on the property and only $50k potential equity, I highly doubt it's a case worth pursuing.
Sorry bout the lack of info - the liens are non-tax. A couple of unpaid business debts from people who screwed him over (from what he tells me). I contacted his attorney and his attorney says that Chap 7 BK will relieve him of liability to pay those debts, however the liens will still remain on the property.
So it looks like the only way to purchase this property would be to either buy the first and foreclose on it, let the bank foreclose on it, or pay off the liens. None of these sound appealing to me, but those are the only ways to handle this particular situation.
On another note I am scheduled to meet with another homeowner whose property is worth about $190k and she's got a $225k lien (non-tax) on the property that her nice ex-husband left her with. Same situation only she hasn't declared BK yet. I'll give her attorney a call and see what he is advising her to do.
So it's sounds like to me the only options she's got are to have someone try to discount the lien and buy the property or let the property go into foreclosure. That has really got to suck...I'm trying to help these people but some of them are just so far upside down that's it's impossible.
:-(
Ryan J. Schnabel[ Edited by rjs9352 on Date 05/05/2004 ]
Yep, with respect to the first property, the liens will stay on the title until one of two things happen:
- the property is put through the foreclosure process and they are wiped out at the auction
- the liens are satisfied or somehow the lienholders decide to play nice and record a release of lien with the recorder's office.
You're pretty much on target with your options.
With respect to the second case, it's probably very much the same, except that you don't mention the amount of mortgage(just FMV and $225k lien). Of course, since the lien here does not exceed the property value by 100%, you might have better luck negotiating with the lienholder.
I have been in a very messed up situation where I was in 2nd position and there were 5 total lienholders on the property. And it was an enormous nervewreck to finally pull a closing together and get lienholders agree to cut their share. There is one approach that you can attempt to use in the situations as you described(such as the first guy):
Go directly to the lienholder. Explain to them the condition of the property, amount of liens ahead of them, fair market value of the property, etc. First get them to discount their lien and release it completely if you buy a house. As a last resort, you(with homeowner's agreement, of course) can offer them a chance to receive SOME money in exchange for the release against only the particular property as opposed to a general release of the lien against the homeowner. This worked for me.
Ah that sounds like a good idea - I hadn't thought of asking them to release the lien from the property for a fee. Thanks for mentioning that.
Ryan J. Schnabel