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Most real estate loans are “secured” by a mortgage (deed of trust in Colorado). The security is the borrower’s property. If the borrower stops paying back his or her loan, the lender will terminate the borrower’s interest in the property and sell it to recoup its loan proceeds. The process is called foreclosure.

Mortgages are consensual liens (i.e., the borrower consents to a lien against his or her property in exchange for the loan). Not all liens are consensual. If an owner has work done to his or her property and a laborer or material supplier is not paid, a mechanics’ lien may be filed against the property. An unsecured creditor (e.g., a credit card company) may sue for non-payment and obtain a judgment. A judgment recorded in a county in which the judgment debtor owns property becomes a lien against the property. Failure to pay federal or state taxes may result in a tax lien. All liens, whether consensual or non-consensual, can be foreclosed. In Colorado, foreclosures pursuant to deeds of trust are handled by public trustees. Foreclosures pursuant to other liens are handled through the courts.

Foreclosure is the process by which the holder of a lien causes the “auction” of the liened property in order to satisfy the underlying debt evidenced by the lien. Foreclosure extinguishes the interest of the property owner and those parties with a secured interest junior to that of the foreclosing party (a senior lien interest survives foreclosure). The underlying debt is satisfied (i) by funds from the auction high-bidder; or (ii) if there are no competitive bids, by funds from the sale of the property by the foreclosing party after foreclosure.

In Colorado, prior to auction, the owner can stop the process by paying the debt current (“curing”), or by paying it off entirely. A junior lien holder protects its interest by “redeeming” the property after auction – that is, by paying the bid amount of the foreclosing party (or the auction high-bidder, or a prior redeeming lien holder). A redeeming junior lien holder (i) becomes the owner of the property (and can sell it to satisfy its own debt); or (ii) has its own debt paid by a latter redeeming junior lien holder.