If you are overdue on a payment owed to a creditor, you might be running the risk of a deficiency lawsuit and judgment against you. Depending on the kind of debt you owe, a creditor may be able to take your personal property, like your car, and put liens on real property, like your house. Read more to learn how these judgments work and what creditors can legally do to satisfy outstanding debt.
Written by Attorney Natasha Wiebusch.
Updated July 20, 2021
If you are overdue on a payment owed to a creditor, you might be running the risk of a deficiency lawsuit and judgment against you. If you ignore the lawsuit, you might find out that your creditor has taken money right out of your bank account. This might seem extreme, but if a creditor gets a judgment against you in court, they can take the money out of your debit account by putting a bank levy on it for the money they’re owed.
This isn’t the only thing that can happen if you ignore a lawsuit from a creditor. Depending on the kind of debt you owe, a creditor may be able to take your personal property, like your car, and put liens on real property, like your house.
In this article, we’ll cover how these judgments work and what creditors can legally do to satisfy outstanding debt. Learning what you can about judgments now can help you to either prevent one from being entered against you or help you respond to any that may have already been entered.
If a creditor files a lawsuit against you to recover money owed, and they win, the court will issue a judgment against you. This is sometimes called a money judgment, and it allows the creditor to initiate judgment collection efforts.Once a judgment has been entered against you, the creditor may now be referred to as a judgment creditor and you may be referred to as a judgment debtor.
After there's a court judgment, it's a good idea to limit this damage by seeking a settlement with the judgment creditor. A settlement is an agreement between the judgment creditor and you that allows you to pay a portion of the amount of the judgment in exchange for forgiveness of the remaining amount owed. Judgment creditors often agree to settlements because they’d rather not spend time fighting to get paid. Creditors also know that if a judgment debtor files for bankruptcy, it might prevent them from getting paid at all. Settlements can prevent money from being taken out of your bank account or paycheck through levies and paycheck garnishments.
If Your Judgment is from Another State
Judgments from other states are called foreign judgments. In the past, some judgment debtors would try to avoid paying their debts by leaving the state. If the judgments were recorded in another state, then the court in the new state wouldn't have jurisdiction over the debtor to obtain payment.
Since then, states have passed laws to prevent this from happening. Now, judgment creditors can enforce a judgment by registering the judgment in the state where a debtor currently lives, generally by using an authenticated copy of the judgment and a sworn affidavit. An affidavit is a document wherein either the judgment creditor or their attorney swears to the judgment’s authenticity.
Once the judgment and affidavit are filed with the court in the county where the debtor lives, the creditor needs to file the necessary paperwork with the clerk of the court. Once they've filed the paperwork, the court—now having jurisdiction over the case—will issue a court order validating the judgment so that the creditor can begin collection efforts pursuant to the court order.
This process is called domesticating a judgment. The “ins and outs” of this process vary depending on the state you live in. Just remember that you cannot avoid a judgment simply because you live in another state than the state in which a judgment was filed against you.
If The Judgment Is From Creditors’ Rights Arbitration
Creditors can also obtain a judgment by going through creditors’ rights arbitration instead of filing a civil case. Although arbitration is not a court proceeding, the results of arbitrations are usually respected by courts. You may need to go through arbitration if you agreed to this process in the event of a dispute when you signed a loan to borrow money from the creditor. To obtain a judgment against you, the creditor would then need to take the results of the arbitration and file them with the court to request that it be enforced.
Most states have laws that allow judgment creditors to interrogate judgment debtors about their personal financial information, including where their bank accounts are, where they work, what property they have, where their other assets are (including any real estate), etc. Judgment creditors want this information so that they'll know where to place legal claims on your personal property and real property through levies or liens, or where to take your wages from using garnishments.
Post-judgment discovery is most commonly conducted in the form of interrogatories, which are written questions that you’ll be required to answer in writing. They could also subpoena you for a deposition, wherein you would have to show up in person to answer questions from the creditor. The court may also subpoena you to testify in court.
The discovery process is often unpleasant, but failure to comply with this kind of request could result in the court holding you in contempt. It's rare, but in some states, it's possible to be sent to jail for contempt of court infractions. Some advocates call jail time for contempt the modern equivalent of debtor's prison.
Wage garnishments occur when a judgment creditor takes a portion of a debtor's wages. Garnishment is a favored way to collect money because it’s cash and a creditor doesn’t have to sell property to get paid. For creditors, it's like taking money out of a cash register.
Many judgment debtors ask their employers to refuse the garnishment, but this is illegal. If your employer doesn't take the money out of your wages, your employer may be held liable for the amount they were supposed to withhold from your pay.
Limits On Garnishment And Exceptions
Federal law limits how much money can be garnished from an individual’s income. A judgment creditor can’t take more than 25% of your disposable earnings or 30 times the federal minimum wage subtracted from your total wages, whichever is less. (15 U.S.C. § 1673)
A judgment creditor’s “disposable earnings” are their total earnings minus legally required deductions. Legally required deductions include Social Security, Medicare, and State Unemployment insurance tax, as well as certain retirement systems.
For example, if you make $12.00 per hour and work 40 hours a week. Your total earnings per week are $480.00. If your income after deductions is $418, then the maximum a judgment creditor could take is 25% of $418, which is about $105.
There are exceptions to the federal limits that are imposed under specific circumstances, includingn federal tax cases and domestic relations cases. And, although federal benefits like Social Security, SSI, veteran’s benefits, and others are usually exempt from garnishment, it’s not always the case. The U.S. Treasury can garnish this income for back taxes (up to 15%) if your federal student loans are in default and for child support (up to 65%).
For more information about federal debt collection, check out Consumer.ftc.gov’s Debt Collection FAQ page.
Bank Account Levies
Judgment creditors can enforce judgments against you by placing levies on your bank account. These levies allow them to withdraw money from your account without your permission.
Levies On Federally Exempt Income
Federally exempt income, such as income from Social Security, is protected from levy. However, if you commingle this money with other money in a single account, then the creditor has no way of knowing whether it’s taking protected funds or not. So, for example, if you accept money from a family member and put it in the same bank account where you are receiving payments for federal benefits, the judgment creditor can take all of the money in that bank account.
You can get the money back by proving that a portion of the money in the account came from exempt funds, but it's best to keep this federally exempt income in a separate account from money that comes from non-federal sources. Separating these funds from the start will ensure that you don’t have to go through the hassle of getting protected funds back after they have been seized.
In addition to federally exempt income, there are also state exemptions you should be aware of. Make sure to check your home state’s exemptions, since you may have money in a bank account that isn't protected as a federal benefit but is still protected under state law.
Other Property A Judgment Creditor Might Seize
Depending on the kind of debt owed, a judgment creditor may be empowered to take any judgment debtor’s assets that are not exempt, which includes personal property and real property. This means they can take your cars, boat, business assets, and even a home under certain circumstances. However, judgment creditors prefer not to take a debtor’s assets that they have to sell because of the time and expense of that process.
If a creditor does decide to take a debtor’s property, they need a writ of execution from the court, which is an order to enforce the judgment. The issuance of a writ of execution signals that the judgment creditor will begin to seize property. The issuance of a writ of execution will also allow law enforcement—usually the sheriff—to assist a judgment creditor in seizing the debtor’s property.
Once they seize the property, there will be a sheriff's sale to sell the property and raise the money to pay the creditor. You may have a right of redemption under your state's law to get your property back after a sheriff's sale if you pay the amount owed in full.
Can A Judgment Creditor Seize Your Home?
Although it’s possible for a judgment creditor to seize a debtor’s home, most judgment creditors shy away from this option because it is an expensive, time-intensive process that may not net them much by way of repayment. For seizure of a home to be “worth it” to the creditor, the equity in the home has to exceed the state law exemption.
For example, if you have a home worth $190,000 with a current mortgage of $100,000 and a second mortgage of $20,000, then you have $70,000 of equity in the home. If that home is your primary home, then the homestead exemption will protect a portion of that equity from any judgment creditors.
How much equity the homestead exemption protects will depend on the state you live in. Let’s say you live in Wisconsin. In Wisconsin, the homestead exemption protects $75,000 of equity in the debtor’s homestead. In the scenario above, the creditor wouldn’t be able to get any money out of the house because the equity in the home is less than the amount protected by the homestead exemption.
If the judgment creditor tries to seize and sell property that is protected by an exemption, you must file a claim of exemption with the court to protect the property. After you file the claim of exemption, you will likely have to attend a hearing to argue why the property that the creditor is trying to seize is exempt.
Different states have different requirements for judgment liens. Creditors can attach judgment liens to a debtor’s property by winning a judgment for the debt that they’re owed. By attaching a lien, they gain rights to that property until the debtor repays the debt.
In some states, recording a certificate of judgment in the county records office is sufficient for a judgment lien. In other states, a lien arises automatically as soon as the court enters a judgment against a debtor.
What Does A Judgment Lien Attach To?
States have different laws concerning what judgment liens may attach to. In some states, a lien may only attach to a debtor’s real property while in other states, it can attach to all of a debtor’s property. Other states require judgment creditors to record the judgment with the secretary of state for it to attach to personal property.
Do Judgment Liens Have Time Limits?
Judgment liens attach for a set amount of time before they expire. As with many other rules related money judgment, how long a judgment lien lasts depends on the state law governing the case. Some states may have a 10-year term whereas the state next to it could have a 12- or 15-year term. When a judgment is about to expire, the judgment creditor can usually extend the judgment for at least one more 10-, 12-, or 15-year term. This means that the lien could last up to 30 years, depending on the state in which you live.
Judgment liens will be lifted once you pay back the money you owe to the judgment creditor and they sign a satisfaction of judgment. The satisfaction of judgment will state that the money has been paid back and it will allow all liens to be lifted from your property. While a lien is active, you generally cannot sell or transfer the property without consent from the judgment creditor that holds the lien.
Having a judgment against you is stressful and the legal documents involved will understandably be a little frightening. The issuance of a writ of execution, while normal in many cases, is bound to add even more stress. However, there are things you can do to deal with the judgment successfully.
If you know about the lawsuit before there's a judgment, consider seeking legal advice from a debt attorney. If you already have a judgment filed against you, as soon as you know of the judgment, try to get a payment plan settlement with the judgment creditor. Whether you can do this will depend on the situation, but a settlement will help you with your credit report and it will stop the creditor from taking other property or your money.
Whatever you do, don’t ignore post-judgment discovery, and remember: You still have exemptions to prevent the creditor from taking certain property.