The Definition of Priority Lien

• The legal website Nolo defines the priority of a lien as "the order in which creditors are paid when the assets of a borrower are liquidated." However, it's common for a borrower to have many liens issued against him or his property, and whether he's filing for bankruptcy is a consideration. After fees and property taxes are liens that have "priority under federal law" such as mortgages and other secured-asset loans. After these are paid, what's left over is distributed to unsecured creditors. Since there usually isn't anything left after secured liens are paid, unsecured debts are often unpaid.
  
  

Liens and Property

• If the home has more than one mortgage, the primary mortgage is the priority lien. The second mortgage -- usually a home equity loan or line of credit -- is subordinated. This means that the second loan is second in line in the event that the home is foreclosed on or sold in a short sale. It's also why second-lienholders often resist attempts by homeowners to refinance or modify their mortgages.
  
  

Liens in Bankruptcy

• Chapter 7 bankruptcy usually requires the borrower to liquidate assets, including her home, to repay as much of her debts as possible. Court fees, attorney fees and wage claims are paid first, followed by costs incurred by creditors. Next come federal, state, and local taxes. Secured debts like mortgage and auto loans follow, with unsecured loans like credit cards bringing up the rear.
  
  Those considering bankruptcy should remember that employer-sponsored retirement accounts may not be liquidated to satisfy lien-holders. Some states also protect IRAs.
  
  

Complications

• Complications occur if there are a "circuity of liens," when a lender doesn't obtain subordination agreements from junior lien-holders. Lenders become "unsure of their lien priority," according to the Los Angeles Daily Journal article "Sorting Out Lien Priority." The foreclosure trustee may also have a difficult time establishing which liens to pay first, and this confusion may result in months of legal hearings and decisions.
  
  Finally, even after a bankruptcy discharge, a lender may file a deficiency judgment against a borrower if the lender has been left unpaid after the distribution of assets. Although it is rare, borrowers who are considering bankruptcy must consider this possibility. It is the legal right of a lender to sue for a deficiency judgment, but if there aren't assets left over, the lender's likelihood of success is slim.