Creditors (someone who is owed money from a borrower) come in two categories: secured and unsecured. Secured creditors have a claim against one or more specific assets of the debtor. That means that the parties agreed that, if a default occurs, the creditor can take possession of the specific asset to satisfy the debt. This is typical with a car loan or a home loan. If the buyer of the car or home stops making payments on the loan and defaults, the creditor’s security is the car or the home and the creditor can repossess the car or take title to the home and then sell the asset to satisfy the amount of the outstanding debt.
An unsecured creditor does not have any rights to a specific asset to satisfy an outstanding debt in the event of default.
When a creditor is a secured creditor, the creditor has a consensual lien against the asset securing the debt. This is a voluntary lien. In other words, as a condition to obtaining the loan, the borrower agrees to the pledged asset as security for the loan and that the borrower can take the asset in the event of default.
A consensual lien is typically a result of a loan or other advance of credit. In many cases, the asset that is acquired by the borrower secures the borrower’s obligation to pay for such asset. One common example is the residential mortgage or deed of trust. In this example, the purchaser of the home consents to a bank taking a security interest in the home when a mortgage or deed of trust is recorded against the property. Where the lender advances credit to a borrower specifically for the purchase of the property that secures the debt, the lien is called a purchase-money security interest. Common examples of purchase-money security interest liens include a first mortgage or deed of trust on a home, a vehicle loan and instances where the seller finances the purchase of other property, such as equipment or furniture via a credit agreement.
By contrast, a non-purchase money security interest lien arises when a borrower obtains a loan or advance of credit and pledges property he or she already owns as collateral securing the loan. For example, a borrower obtains a $5,000 loan and pledges a gold Rolex watch worth $15,000 as security for the loan. Thus, if the borrower fails to repay the $5,000, the creditor gets the Rolex. A more common example of a non-purchase money security interest lien is when a borrower obtains a loan, and consents to a deed of trust on a parcel of real property the borrower already owns.
Consensual liens are typically non-possessory, meaning that the creditor or lender does not take or retain possession of the collateral. However, it is possible for either type of consensual lien to be possessory whereby the lender or creditor does take possession of the collateral.
Importantly, consensual liens differ from most other liens because, in Arizona, a creditor does not need to file a lawsuit to take possession of the collateral securing the loan if the borrower defaults in repaying his or her loan. For example, if a homeowner stops making the mortgage payments on a loan secured by a deed of trust on the home, Arizona law allows the lender or creditor to proceed with a non-judicial foreclosure called a Trustee’s Sale. The recording of the Notice of Trustee’s Sale initiates the foreclosure process whereby the creditor will take possession of the borrower’s home in order to then sell it to repay the outstanding debt.
Once the Notice of Trustee’s Sale is recorded, the property is scheduled to be sold “at auction.” Under Arizona law, the sale must take place at least 90 days after the Notice is recorded. During this 90-day period, the homeowner can bring their loan current and stop the foreclosure process. However, once the foreclosure sale occurs, the property owner no longer has any rights to the foreclosed property.
Before borrowing money, it is important to understand that doing so usually creates a consensual lien for the benefit of the lender as security for the loan. And depending on whether it creates a purchase money or non-purchase money security interest, you will better understand the creditor’s recourse and your rights in the event of default.
