Letting a creditor get a judgment against you is dangerous, for a lot of reasons. One of the biggest dangers is a judgment lien on your home.
We just finished a series of 4 blog posts about income tax liens. The first one was about how much better things can be for you if you prevent a tax lien from being recorded against your home by filing a bankruptcy case before that happens.
It’s a similar situation with creditor judgments and the judgment liens they create against your home. You can prevent them from happening and can really help yourself if you do so.
Creditor Judgments Happen Quickly
Let’s get really practical. It’s all too easy to get a judgment against you and a judgment lien against your home.
If you get behind on payments to a creditor, that creditor usually has a right to sue you pretty much right away. Some creditors do. But often they don’t, instead sending your account to a collection agency. And then it’s often sent to a second or third collector until it’s hard to keep track of who is collecting for what. Then when you’re not expecting it—sometimes even years later—you get a lawsuit in the mail or handed to you by a process server.
Then you have only a few days or at most a few weeks to act. The papers you get say you are being sued and that you need to pay the entire balance. You likely don’t have the money being demanded, or any way to get that money. You probably believe that you owe the money anyway so it seems pointless to dispute the lawsuit. Certainly doesn’t seem to make sense to find and pay a lawyer to fight the lawsuit. And it just feels like too much hassle to write up any kind of response to the lawsuit or to respond in any other way.
So when you don’t do anything by the deadline, a “default judgment” is entered against you. That means that essentially the creditor gets what it asked for—for the court to formally confirm that you owe the debt, along with whatever extra charges are requested by the creditor.
You may well not even know that a judgment has been entered against you because often you’re not told.
Collection after Judgment Entered
A judgment is much more than just confirmation that you owe the money that the creditor says you owe. It empowers the creditor to use a list of tools to force you to pay that debt, which is often much, much bigger than you thought because of all the additional charges and fees.
Those creditor tools include actions against you, your income, and your assets. Examples are garnishment of your wages and bank accounts, possible levies on other personal property such as your vehicle, and being ordered to personally go to court to answer questions about your income and assets.
The Judgment Lien on Your Home
A less well known but sometimes even more dangerous creditor tool is the judgment lien. A judgment lien in effect involuntarily turns what you own into collateral securing the judgment amount.
In some states the lien happens automatically upon the court’s entry of the judgment. In other states the creditor has to take the extra step of recording the judgment with the appropriate county or state entity.
In some states a judgment lien applies to both your personal property and your real estate. (“Personal property” is everything you own that isn’t real estate.) Understandably a judgment lien on your home is the scariest.
Foreclosing on Your Home with a Judgment Lien
Depending on your state’s laws, the amount of the judgment, the amount of equity, and other factors, a judgment lien could result in the forced sale of your home by the creditor to pay the judgment amount.
But not necessarily. In some states your home can’t be sold at all or only if the judgment amount exceeds a certain minimum.
But even if your home isn’t sold by the creditor to pay off the judgment lien, the lien would usually have to be paid off if you ever wanted to sell or refinance your home.
This could jeopardize the sale or refinance altogether—because you thought you had a certain amount of equity in your home but find out that you had less as a result of the judgment lien.
Plus a judgment lien is terrible on your credit score. And it lasts for a long time—usually 7 to 10 years—and usually can be renewed for at least one more such length of time.
Stop a Judgment Lien from Hitting Your Home
If you are sued by a creditor, file a bankruptcy case before your deadline to respond to stop a judgment from being entered. Then the creditor won’t get a judgment lien on your home.
Or at least no judgment can be entered without the bankruptcy court’s permission. Usually the court won’t give permission. That’s especially so if the underlying debt is one that will be discharged—legally written off—in the bankruptcy case.
After that the debt is gone and the creditor can take no further action against you or your property.
By filing bankruptcy you usually avoid having to pay any or at least most of the underlying debt. You avoid having a judgment lien imposed on your home. You avoid having to deal with a judgment lien as you try to sell or refinance the home. And you avoid the risk of losing your home to foreclosure of the judgment lien.
Don’t let a creditor get a judgment against you. See a lawyer to find out about bankruptcy, and then, if appropriate, file a bankruptcy case before a judgment lien can be imposed on your home.