Stripping Away Second and Third Liens in Bankruptcy...the Facts!!

I heard something misquoted again today so I thought that I would blog about it. There are many misconceptions and misperceptions about bankruptcy and distressed real estate. I frequently hear that the second (and subsequent liens) will be “stripped away” in Chapter 13. This does not happen automatically. It requires the filing of a Section 507 motion and creditors may object to it. This process is not a quick remedy when trying to strip away the liens and obtain short sale approval.

Realize too, that once a property is in bankruptcy, you will need approval from the court. This too can be a time consuming process, even though courts are eager to resolve all matters – especially ones relating to real estate.

It is also important to note that the Section 507 Motion does not “strip away” priority liens such as HOA and IRS liens. Many do not realize that an HOA not only has a lien against the property, but the individual is responsible personally as well. However, the IRS has a long standing policy of releasing its lien to get a sale accomplished - as long as the debtor is not receiving any money from the sale. The process of releasing an IRS lien is not difficult but it is time consuming. It should take about 4-6 weeks, IF all of the forms are completed correctly. The HOA is another matter. They can be out and out unreasonable to deal with….especially in Florida. I realize that they operate on tight budgets, but their goal should be to get as much as they can quickly, and get a new PAYING owner into the property. Everyone benefits by a new owner getting into the property but for some reason the HOAs have been brutal to deal with.

Anyway, the point of all of this was to dispel and misconception…Chapter 13 is a valuable tool for many, but it is not a quick fix to a short sale dilemma regarding second liens.

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