When most people think of foreclosure they think about the process of satisfying the home owner’s primary, outstanding mortgage. While it is true that foreclosure is chiefly used as a means to recover debt owed on a traditional first mortgage, there are often other liens on the property involved. Some of the most common types of liens are:
- Mechanics liens
- Property tax liens
- lines for water or other utility bills
- and, IRS liens
All of these are types of liens that may be placed on a home due to the home owner’s failure to pay outstanding debts. For example, a mechanic’s lien can be used by a contractor who performed work on a home but was unpaid by the home owner. Additionally, municipal liens can be placed on a home due to unpaid water or sewer bills.
Settling Liens through Foreclosure
Liens, like mortgages, are usually paid off in the order they are recorded. So if there is a second or third mortgage on the property at the time the first mortgage holder begins foreclosure, these are extinguished as a result of the foreclosure. Similarly, if an individual has one lien placed on the property in 2004 and another lien placed on the property in 2005, the 2004 lien generally takes priority over the 2005 lien. However, if the home is foreclosed to pay a junior lien (one established later than previous liens) then the prior liens against the property are not satisfied and must be paid by the purchaser of the property. It is important to keep in mind that with a mechanic’s lien, the date used to determine priority could be the date the work began and not the date the lien was recorded.
Different Rules for Government and Tax Liens
Some exceptions to this general rule applies to property tax liens, a few state tax liens, and certain municipal liens. Liens of this nature may not be eliminated by foreclosure and can be given first priority. Additionally, although IRS liens can be eliminated by foreclosure, it has a 120-day redemption period where it can buy the property from the new owner and attempt to sell it to cover its outstanding lien for unpaid taxes.
Consulting a Foreclosure Attorney
Determining which creditor should be paid and the order each lien will be satisfied at foreclosure is an extremely complicated process. The order each lien is settled is often not clear and can vary from state to state. It is important to consult a Foreclosure attorney experienced in this type of law before the foreclosure process begins.
