Foreclosure Classroom – Lien Priorities – Why it is Important For You …

The lien priorities can be best explained using an example. In simple terms, when you buy a house by financing, the lender puts a lien on the character. It is called a secured loan, because the house is the collateral for the loan. If you, as a homeowner, fail to make the payments, the lender, using a security instrument (mortgage) gets the house back. On one character there can be several liens. Here is the example:

1. There is a first mortgage for $200,000, recorded on 05/01/2005, at 1 PM.

2. There is a second mortgage for $50,000, recorded on 05/01/2005, at 2 PM.

3. There is a judgment for $2,000, recorded on 05/05/2008

4. IRS tax lien for $3,000, recorded on 09/09/2008

5. character taxes lien for $4,000, recorded on 04/15/2009

The rule of thumb is: First in time, first in place. The first lien is senior to all of the other liens. The second lien is junior to the first, but senior to the rest.

Case #1. If the first lien is foreclosing, all of the junior liens are wiped out. Except one. If there is something left over, the next position lien holder gets paid.

Case #2. If the second lien is foreclosing, they have to take over the first lien. This method that the second lien holder is responsible for paying off the first lien holder. All of the rest are wiped out. Except one.

Now let us discuss the special liens – character tax liens and IRS liens. If character taxes are not paid, they are getting paid first. Keep in mind that character taxes have priority over everything. Does not matter when the lien was recorded. This is the reason why at a character tax foreclosure all of the liens are wiped out. All of them! Except one.

Here we are talking about the IRS lien. This is the great exception. IRS lien is never wiped out like the rest. If there is nevertheless equity in the house, the IRS has the right of redemption. They have 120 days to redeem the character and satisfy their lien. IRS rarely does it, but it is possible to happen.

The lien holders nevertheless can pursue their unpaid debt. It is called a deficiency judgment. They can collect their debt as an unsecured loan depending on the state laws. Do you think that the lien holders have a good chance of collecting their debt under a deficiency judgment (their position is as low as a credit card loan)? You are right. Of course not. That is why they rarely do it.

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