How Different Types of Liens Are Affected by Foreclosure

Properties often have more than one lien filed against them, and any one of those lienholders can foreclose on the property owner. For example, a mortgage default will lead to a mortgage foreclosure, while failure to pay property taxes will lead to a tax foreclosure sale. A property’s liens are listed in the land records in the order they were filed. In a foreclosure sale, the lienholders will generally get paid in that same order. Even though the lienholders at the bottom of the list are able to initiate a foreclosure, they may not want to do it because of how little they’d get paid from the sale.

What Is Foreclosure?

Foreclosure is the legal process lenders use to repossess real estate when a borrower defaults on a home loan. There are two main types of foreclosures: judicial and nonjudicial.

In a judicial foreclosure, the lienholder must file a lawsuit to get a court order before they can sell the property. In a nonjudicial foreclosure, the mortgage holder is allowed to initiate a foreclosure action without a court order. The loan document that allows a mortgage lender to foreclose without the court’s involvement is called the deed of trust. The lender in a nonjudicial foreclosure must still provide notices and observe waiting periods required by state law and the loan documents in question.

A foreclosed property typically gets auctioned off at a sheriff’s sale. Depending on state law, a borrower may have a brief window of time to redeem the property by paying the sales price, interest, and any other costs to the winning bidder. State law also determines how long the borrower can remain in the property before being formally evicted.

What Is a Lien?

A lien is a legal claim or right on property that arises because of an unpaid debt. A lien secures a debt by allowing the person or organization holding the lien (the lienholder) to take and sell the affected property if the borrower doesn't repay their debt. The creditor records its lien interest in the public record to make it enforceable. Recording the lien also secures the creditor’s place in line to be repaid if the property is sold or foreclosed upon.

Liens can be voluntary, automatic, or non-consensual. Voluntary liens include mortgages and car loans, wherein the lender uses your property as collateral to secure the loan. Automatic liens like mechanic’s liens and tax liens are created automatically by law as soon a payment is due. Non-consensual liens come from money judgments obtained in lawsuits.

Mortgage Liens

A mortgage lien is created when you use a loan to purchase or refinance real estate. If you don’t make your mortgage payments, the lender has the right to foreclose on your house and sell it. When you completely pay off your mortgage, your lender will release the lien. The loan document that creates the lien and allows the mortgage holder to take back the property in a foreclosure is called either a mortgage or deed of trust.

Your first mortgage is usually the loan you used to purchase your home or to refinance your original purchase mortgage. If you get another mortgage loan in addition to your first mortgage, this will be called a second mortgage. Sometimes borrowers get third mortgages, too. Oftentimes, one of these smaller mortgages will be a home equity line of credit.

Judgment Liens

A judgment lien is a non-consensual lien that arises when a party wins a lawsuit against the borrower and records a lien based on the judgment in the public record. This kind of judgment can arise either from a creditor you chose to borrow from or from someone that sued you and won a judgment against you for injuries or damages.

Depending on the state, a judgment lien can attach to real estate, personal property, and/or vehicles. When a judgment lien attaches to property, it means you can’t sell the property until you’ve repaid the debt. The creditor may be able to enforce its judgment lien by getting the court’s permission to sell your property to obtain payment. A judgment lien recorded in your county can also potentially attach to property that you acquire after a judgment is entered.

Tax Liens

The government uses tax liens to force people to pay all kinds of unpaid taxes, including income taxes, business taxes, and property taxes. These liens can make selling a property quite difficult. Frequent communication with the IRS or state taxing authority is often necessary to successfully sell a property with income or business tax liens attached.

Property tax liens take priority over all other types of liens, including mortgages, and can lead to a tax foreclosure of a property. State law will determine how quickly a local government can foreclose for delinquent property taxes and the extent of a homeowner’s redemption rights.

Mechanic Liens

Mechanic’s liens are usually filed by contractors, subcontractors, builders, or suppliers who didn’t receive payment for work they completed or supplies they delivered. Depending on the area of the country you’re in, mechanic’s liens are also called construction liens or property liens. The rules about mechanic’s liens vary widely between states. If a homeowner fails to pay their debt to the mechanic lienholders, the contractor may attempt to foreclose on the lien.

Lien Foreclosures

Lien foreclosure is the legal process that allows a lienholder to force the sale of a property. Once the property is sold, the lienholders are paid from the sale proceeds. Foreclosure sale proceeds are typically distributed first to property tax lienholders, then to the first mortgage lienholder, and finally to other liens in the order they were filed in the public record. Mortgage lien foreclosures are the most common type of foreclosure because these lenders typically have the most to gain from a sale. In contrast, parties holding non-mortgage liens (for debts other than property taxes) usually have little to nothing to gain by initiating a foreclosure action because the sale may not pay them anything.

State law determines the foreclosure process for the various types of non-mortgage liens. If you have a lien on your property and you don’t know how to handle it, you should seek professional advice from an attorney who handles foreclosures.

Lien Priority

Lien priority determines the order in which lienholders get paid after a foreclosure sale. Generally, liens follow the “first in time, first in right” rule. This means that whichever lien is recorded first gets priority over later-recorded liens. A senior lienholder has greater priority than a junior lienholder. State law determines whether some special liens, like property tax liens, have automatic superiority over all prior liens.

Judgment liens are usually junior liens. Junior lienholders may get nothing from the foreclosure sale. But depending on state law and the sale’s circumstances, the lienholders may be able to pursue an alternative collection strategy like a bank levy or wage garnishment.

How To Get Rid of a Lien

If possible, the quickest way to get rid of a lien is by paying it off. If that’s not a viable solution, you should try to negotiate with your lender or creditor to either structure a payment plan or make an offer to settle the debt for a lower amount.

Filing for bankruptcy may eliminate your personal responsibility for the debt (if the debt is dischargeable), but the lien itself will survive the bankruptcy. This means that the lien must still be paid off before you can sell the property even though the lienholder can’t sue you for the discharged debt. Judgment liens can often be avoided (removed) during bankruptcy by making a special motion to the court. You should consult with a bankruptcy attorney if you need to navigate liens during a bankruptcy.

How To Make Sure a Title Is Free

Sometimes liens get transferred to new buyers, like when a home is purchased through a foreclosure or an auction. But if a title company was involved in a home’s sale, it’s likely that the property went through a thorough title search in the land records to reveal all liens. A title search is the best way to guarantee that no one else has a claim to a property. States and counties vary widely in how much public access they provide to their land records. Some places provide detailed online access and others still require you to visit the county recorder’s office. Paying a small fee to a title company to do a title search is the best way to ensure a clean title.

Let's Summarize...

Liens secure debt by allowing the lienholder to take and sell your property if you don’t repay the debt. Lienholders can recover the debt by getting a court order to foreclose on the property and sell it. Depending on the state, a mortgage lienholder may be able to take back a property without a court’s involvement using a nonjudicial foreclosure. Foreclosure sale proceeds are applied to liens in the order they appear in the public record, which means that lower priority lienholders may not get paid at all from a sale. You can get rid of a lien by paying it off or negotiating with the creditor, but you should get an attorney’s help to deal with liens in bankruptcy.