Junior creditors are at a disadvantage when senior creditors decide to foreclose on a debtor’s mortgage. The senior creditor has priority in the foreclosure sale, and the junior creditor may receive little or no compensation for what the debtor owes it because its debt is often unsecured. A junior creditor can be:
- A lender that gave a second mortgage to the debtor with the property as collateral; or
- A party that received a judgment lien against the debtor’s property as the result of winning a lawsuit against the debtor.
A junior creditor can put itself in a position to receive some compensation from a foreclosure by participating in the foreclosure process. It may also file a lawsuit against the debtor to collect money still owed from its lien.
Sale Surplus
A junior creditor may claim the surplus from a foreclosure sale as long as it establishes its lien on the foreclosed property during the process. This requires the junior creditor to:
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