Lien Priority

This is one of my many judgment articles. There's lots of kinds of liens on property, for example senior liens, junior liens, second trust deeds, first mortgages; and variations on these liens, and some more names for the basic kinds of liens.

I'm a Judgment referral expert, not an attorney. This article is only my opinion, please hire an attorney if you require legal advice.

Liens are the simple method of securing debts as the lien attaches itself to all properties the debtor owns now or may own in the future, which means creditors will get some chance to be paid.

A debt can usually become secured when a creditor records a lien, that attaches debts to all debtor properties within the state or county, and the lien most often needs to get satisfied before the debtor can sell the property. The lien causes real property collateral for debts.

If the debtor doesn't pay as agreed, a creditor holding the lien may force the auction of their property in a foreclosure to try to be repaid.

There may be more than one liens on the same real property. When one of the lien holders forecloses on the property, what will happen to the remaining lien holders? This article explains who's entitled to get any potential excess funds from an auction sale, if there is any available.

Property lien priority within California usually is dependent on which person or entity records a property lien first. The first to record a lien most often has priority over any property liens which get recorded later.

Property lien priority is defined by Civil Code 1367(d) which states: (d) A lien created pursuant to subdivision (b) shall be prior to all other liens recorded subsequent to the notice of assessment, except that the declaration may provide for the subordination thereof to any other liens and encumbrances.

As an example of the way property lien priority works is if the debtor (owner) buys a house for $600,000. They get a loan for the entire amount of $600K. The loan uses the property to secure the loan and will be in first position, and it will become the senior lien. The lender records their lien quickly, within California most often as a "deed of trust", commonly called a first trust deed.

For the example, the debtor then starts a credit line on the house with a credit limit of $40K. His credit line will be secured by his house and that lien gets recorded after the (purchase-money) first trust deed. The line of credit lien is behind the $600K lien.

The last property lien is attached after the debtor gets an 8K judgment against them. The judgment creditor then records their lien which will be in third place. The judgment owner's property lien is behind the first 2 liens.

All future recorded liens will get a priority arranged by the date they're recorded.

What will happen after one of the liens gets foreclosed on? There's 2 possibilities, a junior lien foreclosing and a senior lien foreclosing.

When the 1st (senior) lien holder forecloses, most often the junior liens get extinguished. The debts are still there, but the collateral for the debts is removed. Junior liens are unsecured creditors when the most senior forecloses.

A 2nd way it can go is if the foreclosure is done by a junior lien holder. The rules are identical for all liens recorded after that junior lien. All liens recorded after a foreclosing junior lien get extinguished. The senior liens are not disturbed. The property purchaser at the foreclosure auction purchases the property subject to the senior lien, and will need to make payments to the senior lien holder.

When nobody bids at the foreclosing auction, the senior lien holder will get the property, and the previous homeowner is most often liable for any costs that the senior lien holder suffers.

What will happen after the debtor's house gets sold in foreclosing action and the auction yields more cash than the amount due to the lien holder that foreclosed? This is surplus funds, and the right to such money is covered by law in California Civil Code 2924k.

California Civil code 2924k explains that the 1st expense that will get paid when a foreclosing auction, is the expenses and costs of the foreclosing auction. After that, the lien holder that foreclosed and the senior liens get paid. When there's any fund left, then all liens that are junior to the foreclosing lien get paid by their priority. Finally, if any money is left, they're paid to the previous homeowner.

For an example of the way it works is when the most senior lien owner forecloses on the house and the house sells for $640K. First, all expenses of the auction sale are paid off, for example $5K, and that leaves $635K. After that, the most senior lien of $$600K is paid fully, leaving $35K. That $35K pays off the next most senior, the $40,000 credit line, that may not be at the full $40,000 limit. Any funds that are left are paid to the 3rd lien holder, the judgment creditor.

What happens when a junior lien forecloses? As an example the credit line forecloses and the house is auctioned off for $50K. The house just sells at $50K as the winning bidding buyer at the auction purchases the house subject to the previous $600K 1st mortgage.

For this example, first the expenses of the auction sale get paid (e.g.) $5K, leaving $45K left. After that, the credit line is fully paid off for $30K, leaving $15K in extra funds. The judgment creditor is paid fully for their $8K judgment lien. That leaves $7K left, and that gets paid to the debtor. The senior lien holder is not paid as their status isn't changed by the foreclosure action of the junior lien. The high bidder is purchasing the property subject to any senior lien holder(s).

An important exception every lien holder should know about is the highest priority of property tax liens. These liens always get priority over any other liens and it does not matter when the liens got recorded. One more problem would be when the debtor applies for bankruptcy.

Mark Shapiro - Judgment Broker - - where Judgments go and are quickly Collected!

This article was published on 24 Aug 2014 and has been viewed 719 times
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