Implementing the best program for your situation is not all we must know in order to protect assets via equity stripping. We must also know what to do if a judgment or other non-consensual lien, such as a federal tax lien, attaches to equity stripped property (hereinafter we’ll include all such liens when we use the term “judgment lien”). Although a judgment lien may not attach to any actual equity, if we ever sell the property, the lien may follow the sold property afterwards. Since prior liens are usually paid-off at the point of sale, this means that these hostile liens could then be the first liens on the property once the buyer acquires it! Of course this would be unacceptable to the buyer, as well as to any institution that might finance the purchase, so before selling this property, we must get rid of all hostile liens. This is accomplished by having our friendly lien foreclose on the property. Foreclosure, of course, is only necessary when you want to sell equity-stripped property that has junior hostile liens on it. Often a favorable settlement is reached prior to this occurrence, and thus the hostile lien is removed and foreclosure is not necessary.

Before discussing foreclosures, we must warn that not all states treat foreclosures identically. Therefore, checking with a local attorney is a must before foreclosing. With that in mind, foreclosures typically happen one of two ways: by judicial foreclosure, or by a private party foreclosure. The type of foreclosure depends on the type of lien filed against the property. If the lien is a mortgage, then foreclosure occurs under court supervision. A deed of trust is foreclosed without court oversight. Obviously, a deed of trust is easier to foreclose, since it doesn’t involve the court, and therefore a deed of trust should be used as the lien document of choice whenever possible. Regardless, however, expect to pay $2,000 to $5,000 to for the entire foreclosure process.

The foreclosure process usually requires posting at least a couple public notices of such in a local newspaper or other publication, and it can take anywhere from three to six months from its inception before the actual auction occurs. The auction will typically be held by the deed trustee if the lien is a deed of trust, or a sheriff if the lien is a mortgage. When a foreclosure sale is held, the minimum bid is usually the amount of the lien that is being foreclosed. The winning bidder must pay at least this amount, or more, if he bid above the minimum. However, when the bidder acquires the property, it is still subject to senior liens. For example, if we have a $500,000 home with a $400,000 1st mortgage and a 2nd lien (which is our equity stripping program) on it for $250,000, and the 2nd lien forecloses, the bidder must pay at least $250,000 and he still pays on the $400,000 mortgage note after he acquires the property. Any liens junior to the foreclosing lien, however, are wiped out, and the buyer has no obligation to pay them.

Obviously, in our preceding example the buyer would not be getting a good deal. He’d pay at least $250,000 for a $500,000 piece of property, but he’d still have to pay off the $400,000 1st mortgage. This begs the question “what happens if no one bids at the auction, since doing so may not be a good deal “In this case, if there are no bidders, then the lien holder who foreclosed becomes the new owner of the property, which is still subject to senior liens but free of junior liens. If this lien holder was an entity friendly to the property’s owner, it could then sell the property, and sale proceeds would flow into that LLC, thus remaining out of creditor reach. Careful planning would even allow us to restructure the entity so that the Internal Revenue Code §121 exemption 339 on gain upon sale of a personal residence is allowed when the property is sold.

In summary, although equity stripping requires great skill to do correctly, creative and knowledgeable planners should have no problem finding an effective equity stripping method that meets their clients’ needs while minimizing the expense and effort involved in maintaining such a program.

Website - http://www.AssetProtectionAttorneys.com