When a creditor files a lien against your property, the lien attaches to the property title. If you sell the property, you must pay off the lien before you can receive any of the sale proceeds. Creditors, however, don't have to wait for you to sell your home to recover the debt you owe. Any lien holder has the right to force your home into foreclosure for nonpayment. Lien payment procedures are considerably different for foreclosures than for private sales.
Primary Mortgage Lender
When and if a lien holder gets paid during a foreclosure depends on when the creditor filed its lien. The primary mortgage holder is generally the superior lien holder because it filed the initial lien on the property. Most foreclosures are conducted by the superior lien holder. When a superior lien holder forecloses, it does not have to pay off any “junior” liens. Junior liens are any claims filed after the superior lien holder's claim. A second mortgage, for example, is considered junior to the primary mortgage. After the foreclosure, all junior liens are cleared from the home's title.
Junior Lien Holders
A creditor can initiate foreclosure regardless of its lien priority order. A second mortgage holder, for example, holds a junior lien if the house carries a first mortgage. That doesn't stop the second mortgage holder from foreclosing, but it does affect the way the lender must distribute the foreclosure proceeds. A junior lien holder must use any money it receives from the foreclosure sale to pay off creditors who hold liens superior to its own before it can apply the money to the homeowner's debt. It must distribute any additional funds amongst the junior lien holders according to each lien's priority order.
A junior lien holder has the right to buy out any superior claims in order to put itself in first position for payment following a foreclosure. For example, if your second mortgage lender wants to foreclose but an outstanding first mortgage prevents it from receiving any proceeds from the sale, it may opt to pay off your first mortgage. This puts the second mortgage lender's lien in first position for payment after the foreclosure sale.
Debt After Foreclosure
Although foreclosure disposes of junior liens, it doesn't wipe away your liability for those debts. The debts remain intact regardless of whether the creditor has a valid lien. After foreclosure, your former lien holders will often pursue other collection methods to recover the debt you owe. A second mortgage lender, for example, may sue you after losing its lien. State laws vary, but winning a lawsuit generally gives the lender the right to seize your bank accounts or garnish your wages. In some cases, the lender may attach a new lien to other property you own, such as your vehicle, and seize that property in lieu of payment.
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