If you own a home, you may be wondering if a creditor can force the sale of your real property to pay off a judgment against you. A judgment awards a debt collector or creditor a court order that can be used to collect the funds they are owed via garnishment or bank account levy. This article explores judgment liens and how they can impact your home ownership.
The Covid-19 pandemic is leaving people struggling with debt understandably scared about what their creditors can do to them. For example, when individuals fall behind on their credit card debt, they run the risk of having their credit card companies and debt collection agencies pursue judgments against them. A judgment awards a debt collector or creditor a court order that can be used to collect the funds they are owed via garnishment or bank account levy. Individuals who own real estate may be wondering if a creditor can force the sale of their real property to pay off a judgment that was entered against them. It’s important to understand whether a judgment lien can allow creditors to force the sale of a person’s home so that homeowners can make informed decisions about their debt relief options.
How Does a Creditor Obtain a Judgment Against Me?
Generally, when a person has outstanding debt that has been unpaid for more than 90 days, their debt is sold to a third-party debt collection agency. Typically, when this happens, the debt collector will try to collect the debt that is owed by sending the individual notices in the mail and calling them. Many times, people ignore these notices and phone calls because they don’t have the money to pay their outstanding debt. Sometimes, the debt collection process can take years before the creditor decides to pursue further action. As the account continues to go into delinquent status, the creditor or debt collection agency may choose to file a lawsuit against the individual for the amount of money they owe.
When a lawsuit is initiated by a debt collector, the debtor will receive a copy of the summons and complaint in the mail. Individuals have a specific amount of time to answer the lawsuit or appear in court. If an individual answers the lawsuit and loses, the court will issue a judgment against the individual. However, the worst thing a person can do is ignore a debt collection lawsuit. When a person ignores a lawsuit from a collection agency, the court will issue a default judgment against the individual. This essentially means that the debtor has forfeited their opportunity to defend themselves against the lawsuit. A default judgment is a court order awarding the creditor the amount they demanded in the complaint because the debtor failed to respond to the complaint or appear in court. Once a creditor is awarded a default judgment, they can pursue other collection methods against the judgment debtor.
What Happens When a Creditor Has a Judgment
Once a creditor has a judgment against an individual, the collection methods open up for that creditor. The judgment may give creditors permission to garnish wages, levy bank accounts, and place liens on real property and personal property.
The two most common collection methods creditors typically pursue are wage garnishments and bank account levies. A wage garnishment allows the creditor to direct an individual’s employer to set aside funds directly from their paycheck until their debt is paid off. By contrast, a bank levy allows creditors to withdraw money from a person’s bank account without their consent. Any money the creditor receives through the frozen bank account is used to pay off the outstanding debt.
Sometimes, although rare, creditors can place liens on a person’s property to collect the money that is owed. The court judgment can allow creditors to place a lien on an individual’s car, other personal property, or real property. When this happens, creditors may be able to force the sale of the property and use the proceeds from the sale to pay off the outstanding judgment.
Liens on Real Estate
After a garnishment, the most common type of collection tactic by judgment creditors involves putting liens on real estate. After a creditor is awarded a civil judgment in court, the creditor will go to the County Clerk’s office with the copy of the judgment and ask permission to file a lien on the individual’s property. The recorded lien will put everyone on notice of the debt. Once a lien is filed, the individual’s property will not have a clear title. Thus, if the person plans to sell or refinance their home, they won't be able to until they pay off their debt or otherwise successfully resolve the lien.
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Can a Judgment Creditor Sell My Home?
Yes, judgment creditors can sell your home if you have outstanding debt, they have successfully placed a lien on your home, and you have not worked out arrangements to avoid a foreclosure. However, it is extremely uncommon for creditors to pursue this route. It’s rarely worth it for a judgment creditor to attempt to sell real property to pay off a lien because of the costs associated with this process. To force a sale of the property, the creditor would have to foreclose and pay off the mortgage company and other lienholders before paying themselves. Therefore, it isn’t typically cost-effective for them to pursue this route.
The homestead exemption exists to protect the value of a person’s primary residence from creditors. Homestead exemption laws prevent creditors from selling a person’s home to satisfy a debt. Depending on the state the person lives in, the value of the homestead exemption can vary. Essentially, this exemption requires a creditor to pay the former homeowner the state-specific homestead exemption amount before they can pay themselves from the proceeds of the sale of the real estate in question. This means that a judgment creditor who forces a foreclosure won’t get paid until the house is sold and the homeowner is paid their homestead exemption amount. In these scenarios, the creditor becomes the titleholder of the property.
Bankruptcy and Judgment Liens
Individuals may be able to use bankruptcy to resolve their financial challenges, even if they are dealing with judgment creditors. However, this process can be complicated. A judgment lien can survive a bankruptcy proceeding. If so, the lien will continue to remain attached to the real property even after the bankruptcy is filed, unless you’re able to successfully petition for its removal. Individuals may be able to successfully remove a judgment lien in bankruptcy as long as 3 lien avoidance criteria are met:
The lien is the result of a monetary judgment that was issued as opposed to consensual settlement terms,
You have equity in the property protected by an exemption, and
The lien impairs your ability to take full advantage of your exemption amount.
To avoid a lien through the bankruptcy court, the individual must file a motion with the court and the judge will determine whether they will enter an order avoiding the lien or not.
If the Judgment Has Not Been Reduced to a Lien
If a judgment has not been reduced to a lien, the creditor is treated as an unsecured creditor through the bankruptcy process. Individuals considering Chapter 7 bankruptcy can use the bankruptcy process to eliminate eligible unsecured debts. Unsecured debts are generally those debts that are not secured by property. Examples of unsecured debts include credit cards, personal loans, and medical bills. As a result, real estate judgments that have not been reduced to liens may be effectively discharged in Chapter 7 bankruptcy cases
If the Judgment Is a Lien
If the judgment has been reduced to a lien, the situation gets more complicated. The judgment will be treated as a secured debt in bankruptcy. A secured debt is a debt that is attached to property as collateral. This means that the creditor retains the right to repossess the property as repayment for the unpaid balance of the loan in question. Remember however, that your lien can be avoided if it impairs your ability to take full advantage of an exemption, like the homestead exemption. You will need to file a separate motion to avoid the lien against the lien holder. If there is not enough home equity remaining after the mortgage is paid, to pay both the judgment lien and the exemption, the lien will impair the homestead exemption and can be avoided under both Chapter 7 and Chapter 13 actions. It will be important to record the court order avoiding lien with recorder’s office so there’s no question in the future whether the lien is still in effect
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Individuals who have outstanding debt and are worried about their property being sold to pay off their debt should understand that judgment lien holders rarely force the sale of a person’s property. However, individuals should take action to address any lawsuits against them before the debt is reduced to a judgment and become a judgment lien, as judgment liens are complicated and consequential. Tacking action immediately can prevent the creditor from pursuing stressful collection avenues. Individuals who have outstanding debt and own property should speak with a bankruptcy lawyer who can give legal advice regarding the options they have available to them.