Posted by Josh on November 13, 2002 at 18:12:42:
Upon any default by the mortgagor-borrower (i.e., failure to make principal and interest payments), the mortgagee (you) has a right to foreclose. Almost all states require foreclosure by sale, under which the property is sold to satisfy the debt in whole or in part. You will need to institute a foreclosure action (with the help of a lawyer) against the borrower to start the process.
Until the foreclosure sale, the borrower may redeem by paing off the mortgage and accrued interest (this is called “equitable redemption”). Some states also allow the debtor to do this after the sale (called “statutory redemption”). If the sale takes place, the proceeds are distributed according to the priority of the interests. Therefore, the first mortgage–for $265K–would be paid off, in full, before you would see a nickel of the money. If the proceeds are insufficient to satify the entire debt, you would have the option of bringing a personal action against the mortgagee for the deficiency.
I am, unfortunately, unfamiliar with the bankruptcy issues, but I hope this helps.
Josh