Lien Priority and Perfection

When a debtor defaults on a loan or fails to meet terms of a payment arrangement, a creditor can pursue a court judgment against the debtor. After the court rules in favor of the creditor, the creditor may attempt to collect the debt in three ways:

  • Garnishing the defendant’s wages
  • Garnishing the defendant’s bank account
  • Seizing personal property/real estate.

Of those three methods, seizing personal property is the most complicated, but when a debt is too large to be satisfied through other means, it may be the only viable option for the creditor to recoup its losses. To seize personal property, creditors must file a lien – and they may not be the only ones trying to collect an unpaid debt.

About Lien Hierarchy

In Maryland, the primary mortgage lender for a property has a perfected lien – meaning, its interest in the property trumps all other liens and collection efforts. An exception to that rule is when a homeowners’ association or condominium owners’ association is owed monthly fees or assessments. For any primary lien recorded on or after Oct. 1, 2011, a lender that forecloses on a home must pay up to $1,200 to a homeowners’ association or condominium owners’ association, to cover delinquencies.

Creditors may find that a debtor who has failed to repay a loan or debt is also in default on a mortgage, in which case the creditor’s ability to collect a debt depends on the home’s sales price. For example, if the amount owed on the first mortgage is $300,000, and the home sells for $320,000, the lender with the perfected lien collects $300,000, and $20,000 remains to satisfy any secondary mortgages. After secondary mortgages have been satisfied, the remaining funds would be applied to other outstanding debts.

In some instances, a creditor may find that a debtor’s income and assets are insufficient to satisfy a debt. But a Maryland court judgment is valid for 12 years, and can be renewed for a second term of 12 years, allowing a creditor to pursue repayment later if the debtor’s earnings or assets increase.

Types of Debts and Liens

A mortgage is a secured debt, which means the home purchased with the mortgage is collateral for the loan. A car loan is another type of secured debt – if the borrower misses payments, the lender can repossess the car. Unsecured debts include credit card balances and medical bills, and these debts are usually the last to be paid in a foreclosure sale.

Many types of liens may apply to a debtor’s personal property, including:

  • Tax lien – The federal government may file a tax lien when a taxpayer has an unpaid tax debt. These liens do not supersede existing mortgages but would supersede unsecured and subsequent secured debts.
  • Mechanic’s lien – A contractor who remodels a home but hasn’t received payment may get a court judgment against a home in an effort to collect. This lien is also used by suppliers – for example, if a contractor installs a hardwood floor in a home, but hasn’t paid the supplier for the materials, the supplier may pursue a lien against the home in order to collect a debt, regardless of whether the homeowner has already paid the contractor.
  • Second lien – Also called a second mortgage or junior lien, these liens are often small and used to pay off other debts or for home improvements.

When you’re attempting to collect a debt, an attorney can help you understand your rights and determine the best method for getting what you’re owed.

Lusk Law, LLC, assists creditors seeking repayment, helping them avoid litigation when possible, and representing our clients in court when litigation is necessary. Our experienced attorneys have provided legal counsel and representation to creditors in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, and Anne Arundel County, and other counties in Maryland. Please call us at 443-535-9715 or fill out our contact form if you have any questions about this topic.

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