What is a Lien Foreclosure?

A lien foreclosure is an action to enforce a claim on real or personal property. A lender will frequently use a lien to protect his interests when loaning money to a borrower. If a borrower fails to make payments to the lender, then the lender may initiate a lien foreclosure on the specified piece of property. The foreclosure is a legal process that forces the borrower to give the property to the lender. The lender will then sell the property to recover the money he is entitled to receive from the borrower.

To illustrate, a person buying a home most often needs to borrow money to make the purchase. The lender, called the mortgagee, will lend the needed money to the borrower, the mortgagor. In return, the mortgagor agrees to pay back the money with interest within a specified period. The terms of the agreement are defined in the contract, called a mortgage. The mortgage operates as a lien on the home.

In the event that the mortgagor fails to make payments, the mortgagee has the right to foreclose on the home. The actual process of a lien foreclosure on a home will vary based on the laws of each jurisdiction. The mortgagee typically must provide the mortgagor with notice of default before filing a legal action for a lien foreclosure in court. The purpose of the notice is to afford the homebuyer an opportunity to fix the default. That opportunity usually is good for 30 days, though different jurisdictions could have longer timeframes.

The lien foreclosure process will vary by jurisdiction. The ultimate purpose of the foreclosure process is to eliminate the homebuyer’s right of redemption. The right of redemption is an equitable right that entitles the homebuyer an opportunity to pay the debt and keep his property. The redemption period is usually one year, depending on the jurisdiction. If a court has entered a foreclosure decree, the homebuyer’s redemption period will continue until the property is sold.

A person facing a lien foreclosure may want to consider negotiating a deed with the mortgagee in lieu of lien foreclosure. This is a way to minimize a homebuyer’s financial losses when the homebuyer knows he will not be able to cure the default. If the mortgagee agrees, the homebuyer will convey the home's deed voluntarily to the mortgagee. This eliminates the necessity of going through the judicial process of a lien foreclosure. In return, the mortgagee agrees to cancel any debt arising from the mortgage.

If a mortgagee refuses to agree to a deed in lieu of lien foreclosure, then the judicial process will continue. The court will order a public sale of the property. If an auctioneer sells the property for a price exceeding the mortgage and legal costs of the foreclosure, the remaining amount will to the mortgagor. If the price does not cover the mortgage and legal costs, then the mortgagor remains liable for the deficiency. The court will then enter a deficiency judgment against the mortgagor.