A lien is a creditor’s legal claim against property, such as a home, owned by a debtor. The home serves as security for a debt. There are two types of liens. The first are liens the homeowner agrees to, such as mortgages and home equity loans. The second type of lien includes non-mortgage liens that are placed on the home without the homeowner’s consent. These include tax liens (liens placed on property by a government agency due to the homeowner’s failure to pay certain taxes, such as income taxes, property taxes, or gift and estate taxes), judgment liens (liens placed on the home by a creditor who sued, typically to collect an unsecured debt, and obtained a court judgment against the homeowner), and mechanics’ liens (liens filed by a contractor who worked on the home but didn’t get paid).
Once a non-mortgage lien is placed on your home, the holder of the lien can choose to take one of two routes. The lienholder can simply sit back and wait for the day you decide to sell or refinance your home. No buyer will want to purchase your home, nor will any lender refinance your mortgage, with the lien still attached. At that time, you’ll be forced to pay off the holder of the non-mortgage lien to have the lien removed.
The holder of the non-mortgage lien may also enforce its lien by foreclosing, although this is less common. The process of foreclosing on a non-mortgage lien is governed by state law and varies depending on the type of lien that is being foreclosed. For example, property tax liens may often be foreclosed outside of court, while the holder of a mechanics’ liens must typically sue the homeowner in court in order to foreclose.
The foreclosure of non-mortgage liens is less common than the foreclosure of mortgage liens due to a number of factors. One factor is the homestead exemption, which exempts a certain portion of the value of a debtor’s primary residence from liability to certain creditors. (Depending on the state, the homestead exemption may not apply to mortgage liens, mechanics’ liens, and property tax liens.) The amount of the homestead exemption varies from state to state—from zero in some states to an unlimited amount in others. (To learn more about the homestead exemption and to find out how much your state allows you to exempt for your homestead, see Nolo’s section on The Homestead Exemption in Bankruptcy.)
Another factor is the priority of the non-mortgage lien. Many homeowners have one or more mortgage liens recorded against their property, and these mortgage liens typically have priority over subsequently recorded non-mortgage liens. (There are exceptions to this rule. For example, some property tax liens have super-priority over all liens recorded against the property. For more on the priority of liens, see our article The First in Time, First in Right Rule.)
A third reason non-mortgage liens are rarely foreclosed is the cost of foreclosing. If the non-mortgage lien is foreclosed through court, the party doing the foreclosing must pay all of the substantial costs of the typical lawsuit. Even if the non-mortgage lien is foreclosed outside of court, there are still costs involved, such as the cost of publishing notice of the foreclosure sale in a newspaper and payment to the sheriff or other official administering the foreclosure auction.
Non-mortgage liens typically have little impact on mortgage liens. Most non-mortgage liens are recorded after mortgage liens (the reason being that lenders will not loan money if there is a judgment, tax, or mechanics’ lien recorded against the property) and therefore have a lower priority than the mortgage liens. This means that, in any foreclosure sale, the mortgage liens will be paid first out of the proceeds, and the remaining proceeds will be paid to the non-mortgage liens in order of priority. As described above, this alone may be enough of a deterrent to keep a holder of a non-mortgage lien from foreclosing, as there often will not be enough equity remaining to cover the lower priority liens once the mortgage is paid off.
One exception touched upon above relates to property tax liens. In a number of states, property tax liens will take priority over all other liens, including mortgage liens, regardless of when the lien was recorded. Because of the super-priority of property tax liens, many mortgages give the lender the right to collect property taxes from the borrower or foreclose if the homeowner fails to pay property taxes. In the event of foreclosure of a property tax lien, a mortgage lender will often pay the delinquent property taxes, roll that amount into the outstanding mortgage debt, and foreclose on its own.