Key Strategies for Junior and Senior Lienholders in Kentucky Foreclosures

In Kentucky, most liens, junior and senior, can be extinguished during a foreclosure process through default or summary judgment. The property is then sold "free and clear" of these interests.

If you hold a junior lien facing foreclosure on a senior lien, filing a response is crucial to protect your interest in the sale proceeds. A cross-claim complying with KRS 426.006 allows you to receive proceeds from the sale.

If your senior lien faces foreclosure on a junior lien, you can request your mortgage/lien to survive the foreclosure, with the property sold "subject to" your lien per KRS 426.690. This is an alternative to receiving proceeds directly.

The Judgment and Order of Sale dictates the sale rules. Generally, costs of the action, then real estate taxes, and then liens are paid in that order. Counties and municipalities may have liens for code violations or nuisance abatement that take priority over mortgages.

The judgment creditor is usually allowed to "credit bid," meaning they can bid up to their judgment amount without paying additional funds beyond costs and taxes (refer to the specific terms of sale for confirmation).

Sales don't begin at the two-thirds value required to extinguish the debtor's right of redemption. If possible, consider bidding an amount exceeding the right of redemption to maximize potential proceeds. Not bidding can result in a third-party buying the property for too little, leaving you with no recovery.

Things become more complex if the sale is subject to a prior mortgage/lien. Here, the two-thirds value is based on the equity exceeding the balance owed to the prior lienholder(s). To calculate the amount needed to cut off the debtor's right of redemption, you'll need to know the outstanding balance on the prior lien(s). This amount is often estimated based on the claimed amount in the senior lien's pleadings.

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Key Takeaways

1. Bidding Strategies: Sales don't start at the minimum to extinguish the debtor's redemption right. Consider bidding more to maximize your recovery. Not bidding risks a fire-sale scenario where you receive nothing. If the sale is subject to a prior lien, calculate the equity to determine the bid amount needed to cut off the debtor's redemption right.
2. Protect Your Lienholder Rights: In Kentucky foreclosure, failing to respond can extinguish your junior lien. File a response and consider a cross-claim (KRS 426.006) to protect your interest in the sale proceeds. Senior lienholders can request their lien survives the foreclosure (KRS 426.690) instead of receiving proceeds directly.
3. Understand the Sale Order: The Judgment and Order of Sale dictates how proceeds are distributed. Generally, costs, taxes, then liens are paid in that order. Be aware that some county/municipal liens may trump mortgages.