Can a Creditor Attach a Lien to My Home?
If you are in debt, you’ve likely considered how – and if – your liabilities will impact your property. The short answer is yes, they can – but the situation is more nuanced than many realize.
If your debt feels unmanageable at any point, the best debt relief options for you may involve some combination of tackling your debt head-on through a consolidation program or seeking a settlement agreement with your creditors. However, if you have multiple, valuable assets, your path to financial independence may look different: Your creditors may prove to be very aggressive in their collections efforts, since they know you have property that is subject to liquidation. As such, a financial counselor or a debt relief company may advise you to take a different approach to work with your creditors to help you avoid losing your property. The very best debt relief programs out there will know the best steps to take to help you navigate communications with aggressive creditors.
Here, we will dive into the specifics of when a creditor can (generally speaking) attach a lien to your property.
When can a creditor claim a lien on my property?
A creditor cannot arbitrarily declare an ownership interest in your home. In order to do so, it must first navigate the judicial process to win a monetary judgment against you in court. In other words, your creditor must make a legal argument that you owe the debt, give you an opportunity to respond and dispute, and convince a judge of the debt’s validity. Then, a judge must decide that you actually owe the money and enter a judgment.
Once this is done, the creditor must file the lien within a legally prescribed timeframe otherwise, the judgment will not attach to your property. The creditor must file its lien with the Register of Deeds office in the county in which your property is located.
What is a judgment lien?
In short, a judgment lien authorizes a creditor to claim an ownership right in part of your home’s value. In other words, if you want to sell or refinance your property, you will do so subject to the lien – that is, the creditor will need to be paid from the proceeds first.
This ultimately boils down to three key points:
- You must pay your lien in full before you can sell or refinance your home.
- If your house is sold in a foreclosure sale, you must pay the lien before you take any of the sale proceeds.
- Your creditor can force a sale of your property in certain situations.
Variations in state laws
In some states, a lien attaches to the title of the property. This means that any subsequent buyers will take on the responsibility of paying the lien once they purchase the property.
In other states, the lien follows the judgment debtor – that is, you, the original owner of the property. If the proceeds of the sale are insufficient to pay off the lien, the law will consider that lien “extinguished” as to that property. In other words, it will no longer pose a problem for that particular property but will instead attach to other property you possess in the same county. – this means it goes away, but it will remain in effect for any other property you own in the same county.
How to sell your property when your creditor holds a lien
A judgment lien poses a tremendous challenge when it comes time to sell your home. A lender will not loan any funds to your buyer unless all the liens are satisfied before closing. This is because most lenders deem lien situations financially risky and are unwilling to take on that burden.
If the total of all liens on the property exceeds the home’s purchase price, you will need to pay the difference. Similarly, if you want to refinance, you will need to satisfy any and all liens first. Some lenders may be willing to include the balance of the lien in the refinanced amount if there is sufficient equity in the property.
A lien gives your creditor the right to force the sale of your property. Typically, creditors determine this isn’t worth it. When your property is sold to pay off liens, usually there is more than one: a mortgage, a home equity line of credit, and more. As such, creditors are often forced to stand in line with other creditors to determine who will claim proceeds from the sale. Not to mention, the foreclosure process is expensive for creditors. In most states, the law requires them to post a bond and to pay for a title search on the property. If the amount owed on the home is small, it’s generally not financially worthwhile to force the sale.
Creditors are also barred in many cases by state-imposed “exemptions” to judgments. Different state laws create a “homestead” exemption to debtors facing liens on their property. This means that the law will apportion a certain monetary amount of equity in a home that creditors may not claim. In some states, the amount is as low as $5,000. In others, like Florida, 100% of a debtor’s home equity is exempt.
As an example, imagine your home is worth $200,000. You have a $150,000 mortgage and $50,000 in equity. Your state allows $100,000 in exemptions. Since your exemption is greater than the equity in your home, your creditor cannot force a sale. But if your state only allows $10,000 in exemptions, your creditor stands to gain $40,000, so it may determine that it is worthwhile to force a sale.
Don’t leave this to chance
If you’ve been served with a judgment and a creditor has claimed a lien on your property, it is vital to act quickly. The laws surrounding judgment liens are complex in most states, and it is easy to become tripped up in the details, to lose sight of the nuances that protect you, and to simply submit to a creditor’s aggressive collection action. Engage an attorney with experience handling post-judgment collections to help you understand your rights as well as the potential dangers you face post-judgment.