The concept of recording mortgage documents in a central place should be pretty obvious. By recording the mortgage, the world at large will known if there is lien against a certain piece of property. This guards against the risk that the borrower might sell the property without paying the mortgage and it guards against other mortgages or liens attaching to the property ahead of the mortgage. This is called the “borrower risk” and the “creditor risk”. The system works to make sure that a lender gets paid in the proper order when secured by a piece of real estate. Similar concepts govern lending against personal property. When a mortgage isn’t recorded, there is no guarantee the lender will ever get paid.
All jurisdictions follow this logic in one form or another. However, borrowers don’t get away free and clear if a lender messes up and either forgets to record its mortgage or records its mortgage in the wrong place. Most courts will enforce the ‘transfer’ that takes place when a mortgage is signed to the extent that they can. This is complicated further when a bankruptcy case is filed because the Bankruptcy Trustee’s job is to take all available property and use it to pay unsecured creditors. So is an unrecorded mortgage a debt secured by a lien or unsecured?
Unrecorded mortgages are unsecured in a bankruptcy situation. But the borrow does not get the benefit, the unsecured creditors do. And since an unrecorded mortgage is not secured by any lien, guess who gets the most from the Trustee? Mortgage debts tend to be fairly large and so, constitute the largest proportion of any borrowers liabilities. The First Circuit Court of Appeals Bankruptcy Appellate Panel recently decided a case that does just that. You can read more about it on our sister site, Bankruptcy Law Network.
Last modified: May 19, 2013