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Judgments And Foreclosures
The current economy has removed most of the "automatic" part of recording a lien to pay a judgment, however sometimes recording liens are still (often a very long-term) a way to get judgments paid.
During the last five years or so, an incredible number of people have either lost their homes, or are facing the possibility of losing their home or other real estate in a foreclosure or short sale. How does foreclosure, or other judgment debtor property sales, affect a judgment creditor with a previously recorded lien on the judgment debtor's property?
When a judgment debtor falls behind on making payments on their real estate loan, that is usually bad news for creditors. However, occasionally a foreclosure action against a judgment debtor's property might be good for a judgment creditor, possibly increasing the chances for their judgment to get satisfied.
The best scenario is when you recorded a judgment lien long before the judgment debtor's property was foreclosed on, and before the current lender recorded their mortgage or deed of trust. In most states and situations, the first to record their lien usually wins, so that would make your lien superior to even the mortgage lender. Usually, with property sales or foreclosure auctions, any superior (previously recorded) liens (e.g., a judgment creditor's lien) must be paid off first from the net proceeds of the sale.
However, first to record a lien wins, is not always the case. And some creditors, for example federal or state tax liens, are superior to all others, even if recorded after another creditor. In some states, for example Florida, laws are not always fair. I know of a case where a judgment creditor recorded a statewide fraud judgment lien on a judgment debtor who owned bare land in Florida. A negligent lender ignored the creditor's properly recorded prior lien, and loaned the judgment debtor a huge construction loan to build a big house on that bare land. When the judgment debtor's home was almost finished, the judgment creditor started a Sheriff's auction sale, because no homestead could be declared because the house was not yet the judgment debtor's residence.
The lender then sued the judgment creditor to stop the Sheriff sale and to get clear title to the property. After a court battle, the judge quickly agreed with the lender. The judge ruled that it did not matter that the creditor recorded their lien first, the lending company lent money, and they were entitled to get their money back, and the lending company did not defraud the judgment creditor, so the judgment creditor took a bath.
What if your judgment lien was recorded after a lender's mortgage or trust deed was recorded? Sometimes, real estate property that starts in a foreclosure process, never actually ends up being sold at the foreclosure auction.
Sometimes the mortgagor (your judgment debtor) is able to borrow money from a conventional lending source. This not only stops the foreclosure proceeding, it may also get your judgment paid. Most banks and other conventional lenders require that any prior liens get paid off. This is so their new money loan will not be in an inferior position to other lien holders. When this happens, your judgment will be settled or paid off in full.
Sometimes the judgment debtor will be able to find enough money from friends, family, or by liquidating some of their assets, to bring their real estate loan current to stop the foreclosure. If that happens, you probably will not get paid at that time, however your judgment and lien will remain intact, allowing the future possibility of being repaid.
What if your judgment lien is in a junior position, and the judgment debtor's property actually sells at an auction? If the sale price is above what is required for all liens superior to yours to be satisfied, any additional funds from the sale will be applied to your judgment lien, to get you partially or fully repaid.
Of course, when a judgment debtor's house is foreclosed on, there is usually not enough equity to pay the all the liens superior to the judgment creditor's. In that case, the judgment creditor's judgment lien collateral on the property will be wiped out at the sale, and the creditor will not be repaid a dime. The creditor's judgment and unsecured lien remains, however it will no longer be attached to the foreclosed property. The creditor's lien still attaches to other properties the judgment debtor might own now or in the future.
For judgment owners with lots of money, when a judgment debtor's property is sold at auction, in some states and jurisdictions, the creditor may have a right of redemption to buy the foreclosed real estate after the sale at the courthouse auction, until the right of redemption time limit runs out. This only makes sense if one gets instant equity from the purchase, which would usually satisfy the judgment.
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