One of the more confusing situations I see involving homeowners and banks is when a bank already has a properly recorded mortgage against the property, the mortgage fully secures the debt, and yet the bank files a lawsuit in Michigan state court, obtains a judgment, and then records a Notice of Judgment Lien with the county Register of Deeds.

The obvious question is:

Why?

If the bank already has a mortgage on the property, why would it need another lien?

The answer is that a mortgage and a judgment lien are two different things. Even when a mortgage is fully secured, a creditor may have strategic reasons for obtaining a personal judgment and recording a judgment lien.

And for a homeowner who is considering bankruptcy, the distinction can be extremely important.

The Mortgage May Already Give the Bank a Powerful Lien

A mortgage is a consensual lien created by agreement between the borrower and the lender. If the mortgage was properly executed and recorded, it generally gives the lender a security interest in the real estate described in the mortgage.

Michigan law recognizes a mortgage as a security interest in real property.

For example, suppose you owe a bank $200,000 and your home is worth $350,000.

The bank has a properly recorded mortgage securing the $200,000 debt.

From the bank’s perspective, it may already have substantial protection. If the borrower defaults, the mortgage may provide the bank with foreclosure rights, subject to the terms of the loan documents and Michigan law.

So why obtain a judgment?

There are several possible reasons.

1. The Bank May Want a Personal Judgment Against the Borrower

A mortgage is primarily a lien against the property.

A lawsuit, on the other hand, can result in a money judgment against the borrower personally.

That distinction can be very important.

The bank may want to establish the amount owed by obtaining a judgment rather than relying solely upon its mortgage rights.

Once a judgment has been entered, the creditor has additional collection remedies that may not exist merely because it holds a mortgage.

This is particularly important if the bank believes that there may be other assets available to satisfy the debt.

2. A Judgment Lien Can Attach to Other Real Estate

This is one of the most important reasons to understand the Michigan judgment-lien statutes.

Under Michigan law, a judgment lien attaches to a judgment debtor’s interest in real property when the creditor records a Notice of Judgment Lien with the Register of Deeds in the county where the property is located. The lien can also attach to real estate acquired by the debtor after the judgment lien is recorded.

That means the judgment lien potentially reaches beyond the particular property that already secures the bank’s mortgage.

For example:

You own your residence.

The bank has a mortgage on your residence.

But you also own:

• A vacant lot
• A rental property
• A second home
• Commercial property
• An interest in another piece of real estate

The bank’s mortgage may be limited to the property described in the mortgage.

A judgment lien, however, can provide the creditor with a lien against the debtor’s interest in other Michigan real estate.

That may be the real reason the bank went to court.

3. The Bank May Be Protecting Itself Against Changes in the Value of the Collateral

A bank may believe that its mortgage is fully secured today.

But banks don’t necessarily operate based upon today’s value alone.

Real estate values can decline.

Other liens can be recorded.

Taxes can become delinquent.

The property can deteriorate.

The borrower can transfer or acquire other real estate.

The bank may therefore want additional legal protection even though the mortgage currently appears to provide sufficient collateral.

Obtaining a judgment may be viewed by the bank as another layer of protection.

4. A Judgment Can Become Particularly Important if the Property Is Sold

Consider a homeowner who owes a bank $250,000 and owns a home worth $400,000.

The bank has a mortgage securing the $250,000.

The homeowner later decides to sell the property.

The title company will discover the mortgage.

But if the bank has also obtained a judgment and recorded a judgment lien, the title company will also have to deal with the judgment lien.

Michigan’s judgment-lien statutes establish rules governing when judgment liens attach and how they interact with subsequently recorded interests. For example, Michigan law generally gives a judgment lien priority over a lien recorded after the judgment lien attaches, subject to statutory exceptions.

The result is that a judgment lien can create another legal obstacle that must be resolved before a transaction can close.

This is one reason homeowners sometimes discover a judgment lien years after the original debt arose.

5. The Bank May Be Trying to Preserve Its Collection Options

Another possibility is that the bank simply does not want to rely exclusively upon its mortgage.

A mortgage gives the creditor rights against particular collateral.

A judgment can give the creditor additional remedies against the debtor.

The bank may therefore decide that it would rather have both:

A mortgage + a judgment.

From the bank’s perspective, having two potential sources of recovery may be preferable to having only one.

This is particularly true when the creditor believes the borrower has assets beyond the mortgaged property.

But Doesn’t the Mortgage Already Have Priority?

Often, yes.

And this is where homeowners sometimes misunderstand what the judgment lien is accomplishing.

If the bank already has a properly recorded mortgage that predates the judgment lien, the later judgment lien does not magically become a first mortgage.

The recording and priority rules still matter.

Michigan law specifically addresses the priority of judgment liens and provides exceptions involving certain mortgages and other interests.

So the judgment lien may not be giving the bank a better position against the very property that already secures its mortgage.

Instead, the judgment may be providing the bank with additional rights against the borrower and potentially other property.

That distinction is critical.

What Does “Continuing Collateral Mortgage” Mean?

A continuing collateral mortgage can be particularly confusing.

Depending upon the language of the mortgage and the underlying loan documents, a mortgage may secure not only a particular advance but also additional obligations or future advances.

The exact language of the mortgage and loan documents matters.

You cannot determine the bank’s rights simply by looking at the amount originally borrowed.

You need to examine the actual mortgage, the promissory note, modifications, assignments, payment history and any other documents that define the secured obligation.

In other words:

Don’t assume that a mortgage is limited to the amount you remember borrowing.

And don’t assume that because a mortgage is called a “continuing collateral mortgage,” every debt claimed by the bank is automatically secured.

The documents have to be analyzed.

Why Would the Bank Do This if the Property Is Worth More Than the Debt?

This is probably the most interesting question.

Suppose the bank is owed $200,000.

The property is worth $400,000.

The mortgage is properly recorded.

There is $200,000 of equity protecting the bank.

Why spend thousands of dollars pursuing a judgment?

There may be several explanations.

The bank may:

Want a personal judgment.

Want a lien on other real estate.

Want additional collection remedies.

Want to protect itself if the property value declines.

Want to establish the amount of the debt through a court judgment.

Want to make a future sale or refinancing more complicated until its judgment is satisfied.

Want additional leverage in negotiating repayment.

And there can be other reasons depending upon the particular loan documents and circumstances.

What Happens if You File Bankruptcy?

This is where the issue becomes especially important.

A mortgage lien and a judgment lien are not treated the same way in bankruptcy.

A bankruptcy discharge generally eliminates the debtor’s personal liability for discharged debts, but it does not automatically eliminate a valid mortgage lien against real estate.

That is why people often hear the phrase:

“Bankruptcy eliminates the debt, but it doesn’t necessarily eliminate the lien.”

But a judgment lien can present a different issue.

Section 522(f) of the Bankruptcy Code permits a debtor, under certain circumstances, to avoid a judicial lien to the extent that the lien impairs an exemption to which the debtor would otherwise be entitled. Michigan Law also provides that a judgment lien is extinguished when a recorded copy of the discharge order along with a copy of the bankruptcy schedule listing the judgment creditor is recorded with the county registrar of deeds.

That does not mean every judgment lien disappears in bankruptcy.

It means that a bankruptcy attorney must determine whether the particular judgment lien qualifies for avoidance and, if so, to what extent.

This is a very different analysis from determining whether a consensual mortgage lien is valid.

A Judgment Lien Is Not Necessarily the Same Thing as the Mortgage

This is the point I want homeowners to remember.

If your bank has a mortgage on your home and later obtains a judgment against you, don’t assume that the judgment simply “replaces” the mortgage.

It doesn’t.

You may have:

A mortgage lien securing the debt against the property described in the mortgage

and

A judgment lien arising from a court judgment that may attach to other real estate interests.

Those are separate legal interests.

The fact that the bank already has a mortgage does not necessarily prevent it from obtaining a judgment.

And the fact that the bank obtains a judgment does not necessarily mean that its judgment lien has priority over the bank’s existing mortgage.

Why This Matters When You Are Considering Bankruptcy

If you receive a lawsuit from your mortgage company, don’t ignore it simply because you believe:

“My house is worth more than I owe them.”

The fact that the loan is fully secured does not necessarily answer the question of why the lawsuit was filed or what the creditor is attempting to accomplish.

Likewise, if you discover a Notice of Judgment Lien recorded against you at the county Register of Deeds, you should not simply assume that the lien is meaningless because the same bank already has a mortgage on your home.

The mortgage and judgment need to be examined separately.

I would want to know:

• What does the original mortgage actually secure?
• Is it a continuing collateral mortgage?
• What property does the mortgage encumber?
• What does the promissory note say?
• Has the loan been modified?
• Has the mortgage been assigned?
• What amount does the bank claim is owed?
• Was a judgment entered?
• When was the judgment entered?
• When was the Notice of Judgment Lien recorded?
• What other real estate does the debtor own?
• Are there other liens?
• Is the debtor considering Chapter 7 or Chapter 13?
• Does the judgment lien impair a bankruptcy exemption?
• Is there equity in the property?
• Is the debtor planning to sell or refinance?

Those questions can completely change the analysis.

Don’t Assume the Bank’s Strategy Makes No Sense

From the homeowner’s perspective, obtaining a judgment when the bank already has a fully secured mortgage may appear unnecessary.

But creditors don’t always look at the situation the same way the homeowner does.

The bank may be looking beyond the current value of the house.

It may be looking at all of the debtor’s assets, future transactions, additional real estate, collection remedies and the long-term enforceability of its claim.

That is why a lawsuit followed by a judgment and a recorded Notice of Judgment Lien can occur even when the bank already has what appears to be excellent collateral.

If You Have Received a Judgment or Notice of Judgment Lien

If a bank has sued you, obtained a judgment, or recorded a judgment lien against your property, don’t assume that the situation is simply a routine mortgage foreclosure.

There may be significant bankruptcy implications.

In particular, if you are considering bankruptcy, the attorney should review both the mortgage lien and the judgment lien rather than treating them as though they are the same thing.

A properly recorded mortgage can survive a bankruptcy discharge.

A judgment lien, however, may in some circumstances be subject to avoidance under the Bankruptcy Code.

The difference can be extremely important.

If you are facing a judgment from your mortgage company or have discovered a judgment lien recorded against your property in Michigan, have the mortgage, judgment and title records reviewed before you make any decisions about selling the property, refinancing it, or filing bankruptcy.

This article is for general informational purposes only and is not intended to constitute legal advice. The outcome of any particular case depends upon the specific facts, documents, liens, mortgage language and applicable law.