Managing Your Assets: Collecting as a Junior Lienholder
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This brochure is designed to assist you, as the beneficiary of a junior deed of trust, in collecting the amounts owed to you on a debt secured by a junior deed of trust on real property. As discussed below, several factors must be carefully analyzed to ensure that you select the proper method of collection available to you under your particular circumstances.
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What is a Junior Deed of Trust?
A junior deed of trust, simply stated, is a deed of trust which is subordinate to existing liens on the securing property, usually because the junior deed of trust was made, executed and recorded after one or more earlier deeds of trust or other encumbrances.
Junior deeds of trust can be created in several ways. For example, such deeds of trust often arise as the result of a sale of real property, either when a new loan in the full amount of the purchase price cannot be obtained or when an existing loan on the securing property is assumed. In this situation, a junior deed of trust is given to secure the portion of the purchase price which exceeds the balance of the new or existing loan.
Additionally, a junior deed of trust may be created where an existing lienholder, typically a seller, subordinates to another secured debt, usually a construction loan. Finally, junior deeds of trust may arise where the owner of real property obtains a loan secured by the property after its purchase.
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Limitations on Methods of Collection
Different methods of collection are available to you depending upon the circumstances under which your junior deed of trust was created and the circumstances existing at the time of your borrower's default. Analyzing these circumstances will identify the methods you can use to collect the debt secured by your junior deed of trust.
First, if the debt secured by your junior deed of trust arose as the result of your borrower's purchase of the securing property, the debt may be a purchase money obligation and your methods of collection will be severely restricted. A purchase money obligation is either a seller-financed debt incurred to purchase any type of real property (i.e., agricultural, residential, commercial or industrial) or a lender-financed debt incurred to purchase any type of real property other than owner-occupied residential (4 units or less) real property.
Second, if the value of the property securing your junior deed of trust is or may be worth less than the debt it secures at the time your borrower defaults, then you may have a choice of collection methods available to you. The value of the securing property may be less than your debt as the result of general economic conditions (i.e., a falling real estate market) or because the structures on the property have been damaged or destroyed, either wholly or partially. Alternatively, the securing property may have been lost due to a foreclosure by the beneficiary of a senior deed of trust.
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Collecting a Purchase Money Debt
If it turns out that your junior deed of trust secures a purchase money obligation and, hence, is classified as a purchase money encumbrance, then you have only one method of collection available to you: foreclosure. This is because California law provides that the beneficiary of a purchase money encumbrance can look only to the securing real property as a source of repayment of the secured debt. The borrower's other non-exempt assets are not available as a source of repayment. Thus, the question becomes whether you should foreclose and, if so, whether you should proceed by judicial or nonjudicial foreclosure. Our brochure, "Managing Your Assets, When to Judicially Foreclose", provides information to assist you in making this decision.
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Collecting a Non-Purchase Money Debt
If it is determined that the debt secured by your junior deed of trust is not a purchase money obligation, then you have two choices in terms of collection. These choices depend upon whether the beneficiary of a senior deed of trust has foreclosed and the value of the securing property.
Where the senior lienholder has not foreclosed, you are required to proceed first against the securing property even though its value may be less than the amount owed to you, either by judicial or nonjudicial foreclosure. If, however, you choose to proceed by way of a judicial foreclosure and the value of the securing property proves to be less than the amount owed to you, then you may be entitled to recover a deficiency judgment, which can be enforced against all non-exempt assets of your borrower. Our brochure, "Managing Your Assets, When to Judicially Foreclose", can assist you in determining whether a judicial foreclosure may be right for you.
Where the beneficiary of a senior deed of trust has foreclosed and, as a result, your junior deed of trust has been extinguished, you are not required to proceed against the securing property. Instead, you may sue your borrower directly on the now unsecured debt. Any judgment obtained will be enforceable against all non-exempt assets of your borrower.
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Several factors must be analyzed to determine which methods may used to collect the amounts owed to you in the event your borrower defaults. To ensure that you select the correct method, consult an attorney who is experienced in this area of the law.
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