Tax Liens on Foreclosed Properties

The topic to be discussed in this piece is, “What happens to a tax lien if the property is foreclosed?” Here’s the typical scenario: Let’s say that you as an owner are unable to pay your mortgage, so your property undergoes the foreclosure process. Furthermore, a tax lien on your piece of real estate has been added to boot. Also, you house is worth a lot less than what is owed, no equity. In such a case, what happens to the tax lien? On that note, tax liens on foreclosed properties tend to involve the following issues. The law is quite specific about the priorities you need to follow in terms in payoffs. When you’re buying a foreclosure, the IRS liens comes first, followed by the tax liens, then the mortgage liens comes last.

Lien Payment Priorities

Furthermore, it’s usually passed on to the person who buys the property more often than not. Truth be told, when you have a mortgage, your best bet of securing a loan is through a lien. More to the point, a lien is basically a home that’s being pledged as a loan’s collateral of sorts. Most any lender considers a lien on a property a security interest of sorts as well. As such, if you fail to pay a mortgage, a creditor can simply choose to foreclose. Whenever a property is foreclosed due to nonpayment, it’ll be made available at the sheriff’s auction and sold to the highest bidder, wherein the liens will be paid off in according to the hierarchy established above.

Furthermore, when a mortgage document is delivered to the county courthouse, it’s documented, indexed, and filed (not necessarily in that order) so that it’s readily available for public record. This process is known as “perfecting the lien”, so to speak. The filing date sets up the order of the lien, so aside from the usual IRS lien, tax lien, and mortgage lien priority payment, the first lien filed can also determine which individual lien comes first. From there, the next lien will be filed to the second position and so on.

First Come, First Served

There are a few possible developments that can happen regarding tax liens during this specific circumstance. There are times when tax liens are paid off from the proceeds of the aforementioned sheriff’s auction. For instance, if your home at the sheriff sale is available for one hundred fifty thousand dollars and Bank of America is the first mortgage holder that has a mortgage of a hundred thousand dollars and Chase Bank is the second mortgage holder that has a mortgage for seventy-five thousand dollars, only one of them will get paid.

Because Bank of America is in the first position (i.e., the mortgage was filed first), it will receive the full payment. Meanwhile, Chase Bank will only receive fifty thousand dollars. In effect, the borrower will still owe the second mortgage holder twenty-five thousand dollars, but Chase Bank will have to follow that money using other methods such as legal action. If the first mortgage holder started foreclosure, the second one will need to petition the court in order to pursue payment properly.