What to do with that 2nd Deed of Trust

During a period of Laurus Law Group’s existence, we operated business as a tenant inside of a Coldwell Banker building. This unique location brought in a variety of clients, but more relative to today’s article, it brought in many questions from real estate agents. One question, or request, was to “lienstrip” the 2nd Deed of Trust from a house through a bankruptcy. This request was normally asked so that the property could more easily been involved in a short-sale as it was headed to foreclosure. I always responded the same to every request, no. I did this because the real estate agents had a misconceived idea of what lienstripping meant.

In understanding the idea of “lienstripping”, let me start more generally. A 2nd Deed of Trust on a home is more commonly known as a 2nd mortgage, line of credit, or sometimes just a lien on a home that has attached after the 1st mortgage is already attached. In foreclosure law, this 2nd Deed of Trust (DOT) is 2nd in line of priorities. Therefore, the 1st DOT has a priority in obtaining any money from a foreclosure in front of any 2nd, 3rd, or more DOT’s on the property. Thus, when property holders faced a foreclosure from the 1st, many people believed that if you can strip the obligation of the property holder to pay the 2nd DOT, then they can prove that they can continue making payments on the 1st DOT and stall a foreclosure sale.

The idea of lienstripping comes from bankruptcy. In a bankruptcy, a person can rid itself of personal obligations on contracts, lawsuits, and yes, even DOT’s. This is done regardless of what chapter bankruptcy you file. The way the law sees it, there is in personom and in rem lien obligations. In personom (the property holder) obligation to pay can be wiped clean in a bankruptcy. Therefore, that debtor will have no duty to pay the DOT and cannot be held liable for any deficiency in the future. However, bankruptcy does not get rid of in rem (property) lien obligations. Therefore, even after a discharge in bankruptcy is granted, all secured liens stay with the property. This means that after a sale, the liens must be paid off first. It also means that if the debtor decided to stop paying a 2nd DOT, that lien holder may decide to proceed with a nonjudicial foreclosure and take the house. While the debtor would have no obligation to pay any deficiency and cannot be sued by the 2nd DOT for failure to make payments, they may still loose their home for failure to make payments.

Thus, if you want to keep your home, make payments to the lien holders. If you are so behind that you cannot catch up in time to save your home from foreclosure, consider a chapter 13 bankruptcy to allow you to catch up and keep your home.

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