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I am a Judgment Broker, not a lawyer, and this article is my opinion, please consult with a lawyer if you need legal advice.
A lien is the simplest way to secure a judgment debt because it attaches to any property the debtor owns or will own in the future, so the judgment creditor has a chance to get paid.
Judgment debts can be secured by recording a lien, which attaches the debt to any properties in the county or state, and that lien usually must be paid before the property can be sold. A lien makes real estate property collateral for the debt.
If the borrower does not make their payments when they are due, the lien holder can arrange to force the sale of the property in a foreclosure action in order to try to get paid.
There can be several liens on a property at the same time. If one lien holder forecloses, what happens to the other liens? This article explains who is entitled to the possible excess money from a sale, if any is left over.
Lien priority in California is usually based on who records their lien first. The first in time to record their lien usually gets priority over all subsequently recorded liens.
Lien priority is covered by Civil Code Section 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.
An example of how lien priority works is if the owner (debtor) purchases a home for $600,000. To do this, they take out a loan for the full $600,000. This loan is secured by the property and is first in time, so it will be the most senior lien. The lender quickly records their lien, in California usually as a "deed of trust", often referred to as the first trust deed.
In our example, the homeowner later takes out a line of credit against his property for a maximum limit of $40,000. This line of credit is secured by the property and the lien is recorded after the (purchase-money) first trust deed. This lien is junior to the $600,000 lien.
The final lien happens when the homeowner gets a $8,000 judgment against them. The judgment owner records a lien that is in third place. This lien is junior to the previous two liens.
Any later liens that get recorded will be in the priority according to when they are recorded.
What happens when a lien is foreclosed upon? There are two variations, a senior lien foreclosing and a junior lien foreclosing.
If the first (most senior) lender forecloses, usually all junior liens are wiped out. This does not remove the debts, only the collateral. Junior lien holders become unsecured creditors if the senior lien forecloses.
The second variation is when a junior lien forecloses. The rules are the same for any lien recorded after the junior lien. Any liens recorded after the foreclosing junior lien will be wiped out. All senior liens remain. The purchaser of the property at the foreclosure sale buys it subject to the senior lien(s), and will have to make payment arrangements to the senior lien holder(s).
If no one bids at the foreclosure auction, the most senior lien holder usually gets the property, and the debtor is usually liable for any losses that the senior lien holder incurs.
What happens when the property is sold at foreclosure and the auction sale generates more money than what is owed to the lien holder that foreclosed? These are called surplus funds, and the rights to these funds are defined by law in California Civil Code 2924k.
Civil code 2924k says that the first expense to be paid after a foreclosure auction occurs, is the costs and expenses of conducting the foreclosure sale. Next, usually the senior liens and the lien holder that foreclosed are paid off. If there is any money remaining, then any liens junior to the foreclosing lien are paid in their order of priority. Lastly, if any funds are left (an overage), they are paid to the debtor.
An example of how this works would be if the senior lien holder forecloses on the property and it sells for $640,000. First, the costs of the sale get paid, for example $5,000, which leaves $635,000. Next, the senior lien of $600,000 is paid in full, leaving a surplus of $35,000. The $35K goes to the next lien holder, the $40K line of credit, which might not be the full $40K limit. Any leftover funds go to the third lien holder, the judgment owner.
What if a junior lien holder forecloses? For example a 30K line of credit forecloses and the property is sold at the auction for $50,000. The property only sells for $50,000 because the high bidding auction buyer buys the property subject to the existing $600,000 first mortgage.
In this example, first the costs of the sale are paid (e.g.) $5,000, leaving $45,000 remaining. Next, the line of credit is paid off in full for $30,000, leaving $15,000 in surplus funds. The judgment owner is paid in full for their $8,000 lien. This leaves $7,000 remaining, which is paid to the debtor. No payment is made to senior lien holder(s) because their status is not affected by the foreclosure of a junior lien. The high bidder is buying the property subject to the senior lien holder(s).
An exception all lien holders should be aware of is the higher priority of property tax liens. Property tax liens get automatic priority over all other liens no matter when they were recorded. Another complication is if the homeowner files for bankruptcy protection.
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