Real estate foreclosure in New Jersey has many technical requirements and many different time frames to keep track of whether or not you are the lender or the borrower. Sometimes when title defects are discovered during the foreclosure process, it is sometimes best to dismiss the action without prejudice and re-file to ensure clear title. A clear title is a property title without any kind of lien or levy from creditors or other parties and poses no question as to legal ownership. However, not all errors will necessarily cause the foreclosure to be defective. This post describes some, but not all, of the potential issues that may arise as well as some solutions to these problems.
The foreclosing party (normally the lender) may have to indemnify prior open liens on the property. In New Jersey, the lender is required to conduct a title search on the property prior to filing the foreclosure complaint pursuant to R 4:64-1(a). When a lender forecloses on a property only to discover that there was a prior lien that had not been found at the time their loan originated, the lender will generally make a claim against the title insurance policy (if there is one) to clear the title.
Occasionally, when a mortgage is refinanced, the prior mortgage is not paid off. When the new (refinanced) mortgage attempts to foreclose, it may discover that its mortgage is actually in second place, behind the original mortgage. Certain states, by statute, allow the refinancing mortgage to retain the first mortgage’s priority if it meets certain requirements. If the refinancing mortgage does not meet those requirements, or otherwise fails to qualify for statutory protection, the refinance lender may still be able to retain the priority of the original loan through the doctrine of equitable subrogation. Legal or equitable subrogation arises by operation of law where one pays a debt owed by another under circumstances that in fairness entitles the payor to the security or obligation held by the creditor. Conventional subrogation is based on an understanding or agreement, expressed or implied, when an uninterested or unrelated party to the matter who pays the debt of another and thereby becomes entitled to the rights and securities of the creditor.
Similarly, there may be an open line of credit on the property. When homeowners take a line of credit against the equity in their home, they create an open equity line of credit. In order to secure clean title to the property, the equity line of credit must be paid off and closed. Sometimes the line of credit is reduced to zero, but not closed. Once it has been paid off and closed or otherwise satisfied, the lender must issue a release deed or file a certificate of satisfaction with the clerk, in the county where the property is located. If the lien is not released, the lender may be subject to a penalty payable to the obligor and must pay any court costs and reasonable attorneys’ fees associated with collection of the penalty.
A lien may still appear even if the underlying debt was discharged in a bankruptcy. Likely the bankruptcy attorney for the borrower did not void the lien, by way of motion, in the bankruptcy. If this is the case, the borrower-debtor can either re-open the bankruptcy case to file the requisite motion or can file a state court action to cancel or discharge the lien. In New Jersey this is accomplished through the filing of a motion pursuant to N.J.S.A. 2A:16-49.1.
In a foreclosure of real property, delinquent state or federal taxes may become a lien against the property. In New Jersey, state real estate taxes constitute a priority lien on the property that has status over any other encumbrances, regardless of when those liens were perfected. Any failure by the property owner to pay federal taxes will also result in a lien being filed against the property.
In the event that the property is sold while still subject to a tax lien, the proceeds of the sale will first be diverted to pay off the lien. Think of the tax lien as a senior lien on the property.
Additionally, a tax lien can only attach to a property in which the debtor has a sufficient interest as determined under state law. If the debtor lacks sufficient interest, the lien is not valid. Otherwise, the lien must be released or discharged in accordance with 26 U.S.C. § 6325. Although most federal tax liens should be searchable, the foreclosing party should be careful about the presence of a federal estate tax lien, which arises on the death of the property owner, attaches to all of the owner’s property, and can be perfected even if no notice of the lien is filed.
Contact a New Jersey Foreclosure Attorney Today
If you are seeking representation to defend or prosecute a foreclosure action, retaining a competent attorney is crucial. The foreclosure process can be complicated and hiring an attorney who specializes in this area is important. If you are unsure of your rights, please give us a call for a free consultation. We have office locations in Wayne, Hoboken, Newark, and Hackensack.