Can Creditors or Lenders Take Your Mortgage Excess Proceeds?

When a home is sold at a foreclosure auction, there are times when the winning bid exceeds the amount owed on the mortgage. The extra money, known as mortgage excess proceeds or surplus funds, rightfully belongs to the former homeowner. However, before you can claim these funds, it’s important to understand whether creditors, lenders, or lienholders can take a portion—or even all—of your surplus.

Who Has the First Right to Mortgage Excess Proceeds?

After a foreclosure, the funds are distributed in a specific order:

1️⃣ Primary Mortgage Lender – The first mortgage holder is paid in full from the sale proceeds.

2️⃣ Junior Liens & Second Mortgages – If there is any remaining balance after the first mortgage is satisfied, secondary lenders may have a claim.

3️⃣ Other Creditors (Judgments, IRS Liens, etc.) – Court judgments, tax liens, and unpaid debts may also be entitled to a portion of the surplus.

4️⃣ Homeowner (Former Property Owner) – If no additional claims exist, the remaining funds go to the previous owner.

This order is important because not all creditors automatically have the right to take your funds—it depends on the type of debt and state laws.

When Can Creditors or Lenders Claim Your Surplus Funds?

While some homeowners receive their full mortgage excess proceeds, others may find that outstanding debts reduce or eliminate their payout. Here are the most common scenarios where creditors may make a claim:

1. Second Mortgages & HELOCs (Home Equity Loans)

If you had a second mortgage or a home equity line of credit (HELOC), those lenders may be entitled to repayment before you receive any funds. The foreclosure auction proceeds may cover these loans only if there is enough money left after the first mortgage is paid.

👉 Example: If your first mortgage was $150,000 and your second mortgage was $50,000, but your home sold for $220,000, the second lender could claim $50,000, leaving $20,000 in surplus funds.

2. Tax Liens (IRS & Property Taxes)

Government debts, especially tax liens, have priority over most other claims. If the IRS has placed a federal tax lien on your property, it must be satisfied before you can claim the remaining funds. Property tax liens also take precedence, meaning the county can deduct unpaid taxes from your surplus before releasing the funds.

👉 Example: If you owe $10,000 in IRS taxes, the tax agency may claim that amount from your mortgage excess proceeds before you receive your share.

3. Court Judgments & Creditor Claims

If a creditor won a lawsuit against you and obtained a judgment lien, they may have a legal right to surplus funds. However, the process varies by state, and some states protect surplus funds from being used to pay off general unsecured debts.

👉 Example: If a credit card company sued you and won a $5,000 judgment, they could file a claim against your mortgage excess proceeds.

When Creditors CANNOT Take Your Surplus Funds

In some cases, creditors are not allowed to take your mortgage excess proceeds, such as:

🚫 State Homestead Protections – Some states have homestead exemption laws that protect a portion (or all) of your surplus funds from creditors.

🚫 Unsecured Debts (Credit Cards, Medical Bills, Personal Loans) – Unlike mortgage lenders or tax agencies, many unsecured creditors cannot automatically claim your surplus funds unless they have a court judgment.

🚫 Expired Liens – If a lien has expired or was not properly filed, the creditor cannot legally claim your funds.

How to Protect Your Mortgage Excess Proceeds

To ensure you receive the maximum amount of surplus funds, consider these steps:

✅ Verify Lien & Judgment Claims – Check if creditors legally have the right to your funds.

✅ File Your Claim Promptly – Many states have strict deadlines for homeowners to claim surplus funds before they are turned over to the state.

✅ Consult a Surplus Recovery Specialist – Experts like Surplus Refund LLC can help you navigate lien disputes and maximize your claim.

How Surplus Refund LLC Can Help

Recovering mortgage excess proceeds can be complicated, especially when creditors or lenders make competing claims. Surplus Refund LLC specializes in helping homeowners:

✔️ Identify & claim surplus funds before or even after deadlines expire

✔️ Challenge improper creditor claims

✔️ Work with legal professionals to protect homeowner rights

If your home was recently foreclosed and you believe you are entitled to surplus funds, don’t wait—creditors and state agencies may attempt to claim the money before you do. Contact Surplus Refund LLC today for expert assistance in securing your rightful funds!