Liens on Property

A reader recently asked me to write about liens and other encumbrances on real property.  Real property means land .  The reader asked me to describe what happens to an encumbrance on a property that is sold for less than the value of the mortgage.

If someone owes you money, you can sue that person.  If you win, you can register your judgment with the Sheriff in the area where the debtor owns land.  Your judgment is now referred to as an execution against the land and you are an execution creditor .  (The term has nothing to do with executing a person!)

By filing an execution, you now make it so that the creditor has to deal with your judgment when he sells the property.  Problems arise when there is not enough money after the sale to pay all the creditors.

Liens, mortgages and executions are all forms of encumbrances against land.  This generally means that there is a debt owed to somebody by the landowner.  In some cases, the landowner has pledged the land as security for the debt.  In other cases, the law allows the creditor to have security on the property, whether the landowner likes it or not. 

None of these mechanisms guarantee the creditor is going to be paid in full.  All they do is allow the creditors to be paid from the net proceeds of the sale of the property, when the property is sold.  If there is not enough money for all the creditors, some or all of the creditors are not going to be paid in full.  Some may not get paid at all.

There is a system of priorities that determines who gets paid first out of the proceeds of a sale.  Generally, the cost of the sale is paid first.  That includes real estate commissions and legal fees.  Next is usually municipal taxes owing on the property.  After that, mortgages would be paid in order of their priority.  That's why second mortgagees typically charge more interest because of the greater risk involved.  In most cases, if there is any money left, other creditors share in the rest.

If there is not enough money to pay all the creditors, too bad!  The property will still be sold.  The buyer gets clear title to the property.  That means that the new owner, after paying the purchase price, has no responsibility to the lien holders or any other creditors of the seller.  That makes sense.  If it was not the case, no-one would buy the property and whatever equity was available to creditors could never be unlocked.

So, executions and liens can be good ways of securing your judgment or debt, but they are not guarantees that you will be paid in full.