September 14, 2012

Climbing from Junior to Senior: Consensual Lien Subrogation, Avoidance Issues under § 522(f)

What happens to the nature of a debt and priority of its associated lien when, rath­er than buying the obligation, a junior secured creditor pays off in full the debt owed to a senior secured creditor? If the junior creditor has not specifically purchased the obligation from the senior creditor, the debtor may argue that payment of the obligation discharges the senior lien, and although the junior creditor's lien moves into first place, it secures only the original junior obligation—not the full indebtedness. This could have even more significant negative repercussions where the junior creditor holds a nonconsensual lien on property of the debtor that would otherwise be exempt.

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