Judgment liens on real estate and enforcement
Exemption of homestead, 735 ILCS 5/12-901 et seq.
Judgment as liens on real estate
By law, any outstanding judgment can become a lien on real estate in Illinois owned by the judgment debtor or consumer. A judgment lien is a secured claim, belonging to the judgment creditor, to the value of the real estate up to the value of the judgment plus interest, and giving the creditor the right, under certain circumstances, to have the real estate sold in order to satisfy his judgment.
The lien is not automatic. In order to get this lien, the judgment creditor must file certain documents in the county recorder’s office. Creditors with a judgment lien can force the sale of the property subject to the lien. Even without filing for the lien, however, a judgment creditor can still apply to the court to have the property sold by court order to enforce the judgment through the citation process.
If the judgment debtor resides in the real estate, however, the debtor has what is called a "homestead exemption" which can make it difficult to sell the residence of the judgment debtor, see below. Also, if the real estate is sold, the judgment debtor has certain rights to get the property back.
The effect of the liens
A judgment creditor with a lien may be able to force a sale of the debtor’s property and be able to use the proceeds to satisfy his judgment. The sale would be to the exclusion of the other unsecured creditors, but not necessarily to other secured creditors like mortgage lenders that obtained liens before the judgment was recorded. Even if the creditor cannot force the sale immediately, because the real estate is exempt or for other reasons, state law permits the judgment and the judgment lien to remain in effect for 7 years from the time it is entered or revived. An old judgment can be extended, or "revived " twice for additional seven year periods, at any point up to 20 years from the judgement date. So theoretically the judgment could be effective for 27 years, plus an extra for the sale of the real estate after the judgment expires.
For that period of time, the lien will "cloud the title" of the debtor’s real estate because, if the debtor wants to sell the real estate, the lender will insist that the judgment be paid first as a secured claim to make sure the mortgage lien is first in time.
The homestead exception
In Illinois, an individual who occupies real estate as a residence is entitled to a homestead exemption. The home cannot be forcibly sold by court order to satisfy a judgment lien if the amount of the equity interest in the home is less than the exemption amount. The exemption is $15,000 for a single person and $30,000 for a married couple who both own the residence.
This must be compared to the debtor’s equity interest in the property. A debtor’s equity interest in real estate is figured by subtracting amounts owed on a mortgage, or other liens on the house that predate the judgment lien, from the present market value of the property. If the equity is less than the homestead exemption, there cannot be a forced sale of the house to satisfy the lien.
For example, if a home is worth $85,000, but the sum of $75,000 is owed on the mortgage, the debtor’s equity interest is $10,000. If the debtor is married, and both spouses own and live in the residence, they have a $30,000 exemption. Because the debtor’s equity interest in the real estate is less than the exemption, the home cannot be sold to pay their debt.
However, if the value of the home is $150,00 and the mortgage is still $75,000, then the equity in the property is $75,000. The spouses' exemption is still $30,000, so the equity interest is then greater than the exemption by $45,000, so there is equity value available that could satisfy the judgment lien through a sale.
Reasons why the crediter might not want to force a sale
If there is a forced sale, before the creditor could realize any money from the proceeds, any mortgage holder would likely have to be paid first from the proceeds, and the debtor would receive the amount of the homestead exemptions.
This means the creditor actually has to pay $15,000, or $30,000, in cash to a debtor who has avoided payment of the judgment. Because the thought of that payment is distasteful to creditors, they may not want to force a sale.
There are other reasons why a creditor might not want to try to force a sale even if the amount of debtor’s equity interest in the real estate is greater than the exemption amount. The purpose of the laws on homestead is to make it more difficult to sell the residence of the judgment debtor. The creditor must consider the additional costs he must incur such as advertising costs, a lien search, and the evaluation and appraisal of the property. Other costs include:
- The cost of a certified copy of the judgment, which must be given to the sheriff;
- A title report;
- Recording charges;
- Publication expenses; and
- The sheriff’s or other auctioneer's commission for conducting the sale.
On top of that, some courts are slow to process collections simply because of the volume of cases, and the creditor has to take into account the time costs, as well.
It should be noted that the forced sale of property typically is by auction. The actual purchase value at auction is significantly less than the actual market value of the real estate. That means a creditor could force a sale, but the sale would not result in enough money to cover the judgment lien after other secured creditors and the homestead exemption is paid. That is a risk that a judgment creditor must factor into its decision whether to pursue a sale.
It does not make sense for the creditor to force a sale if the fair market value of the real estate is not substantially greater than the creditor’s costs. Those costs include all of the above costs, together with the payment of the homestead exemption and all prior mortgages and liens that are ahead of the judgment lien in priority. In addition, the complications arising from the homestead exemption and redemption rights will make this type of sale not very appealing to potential bidders.
However, many contracts, such as mortgage and credit cards contracts, allow the creditor to collect attorney's fees as part of the judgment. Because the creditor can recover the cost of its lawsuit, and make it easier to pursue the case. In addition, if there is a large anount of equity in the real estate, a full payoff of the debt is more likely through a sale, even after the costs.
Overall, a creditor usually will not find a forced sale of real estate worth the additional time and effort and cost involved. In most situations, the creditor is likely to look for a different method of collection, or will just wait until the judgment debtor refinances or sells the property. The judgment lien must be paid as part of any refinancing or sale of the property, in order to give the buyer or new lender clear title.
Notice and sale
The law requires that a practical effort be made to serve the debtor with notice of any proposed auction sale of real estate, normally conducted by the sheriff. The sheriff is required to publish notice of the sale once a week for 3 successive weeks in a newspaper in the county where the property is located. A notice is also posted in 3 public places within the county, usually within the sheriff’s office and the courthouse. The notice must reflect the date, place and time of sale and identify both the creditor and the debtor. After the sale and payment of all costs and expenses, the sheriff will deliver a certificate of sale to the purchaser.
In most cases, even where the creditor has forced a sale of the real estate, the debtor has the right to redeem the property. "Redeem" means to buy back. This can be done within 6 months from the date of sale by paying the purchaser the amount of money for which the premises were sold, plus interest at 10% annually from the time of the sale. That is different from the foreclosure rules.
Creditor's post-judgment collection methods
Supplementary proceedings, 735 ILCS 5/2-1402
Wage deductions, 735 ILCS 5/12-801 et seq.
Non-wage garnishments, 735 ILCS 5/12-701 et seq.
A judgment in favor of a creditor is an order saying the consumer owes a specified amount of money to the creditor. The creditor can use a number of special legal tools to force the consumer to pay.
The main thing to keep in mind about all of them is that they cannot be used unless the creditor first obtains a judgment. Another thing to remember is that the creditor can be prevented from taking any of these steps by filing for bankruptcy, assuming the nature of the debt is dischargeable in bankruptcy.
Citation to discover assets: debtor
After obtaining a judgment, the creditor can ask the court to direct the consumer i.e., the judgment debtor, to appear in court for an additional or supplementary proceeding. The purpose of this new hearing is to let the creditor ask questions of the debtor about his or her income and assets. In this way, the creditor can discover the consumer’s employer and salary and wages. The creditor can also find out where the debtor's bank accounts are located and what other income or property the debtor has or will be getting.
In Illinois, the document which directs the debtor to come back for this examination is called a "Citation To Discover Assets". The citation might direct the debtor to bring certain documents to the examination.
With this information, the creditor may start proceedings to garnish the debtor’s wages or bank account, see section below on Wage Deductions and Non-Wage Garnishment. Or, the creditor can ask the judge to enter a turn-over order. A turn-over order directs the consumer to turn-over to the creditor some of his income or property that is not protected by law i.e., not exempt.
If non-exempt assets other than cash or real estate are discovered, they can be ordered turned over to the sheriff to conduct a public sale, with the proceeds going to the creditor to pay off the judgment.
Special notice about exemption rights
The citation must be properly served on the consumer, and it must include a special notice. Among other things, this notice must advise the debtor about the debtor's exemption rights and how to assert them in court at the citation hearing or some earlier date. This notice must be in a particular form.
By law, no turn-over order can be entered unless there is proof in the court record that the consumer was properly served with the citation and a copy of the special notice about exemption rights.
Personal property exemptions can be found at 735 ILCS 5/12-1001 et seq. Examples of personal property that can be exempt from collection or attachment are:
- Any property of up to $4,000
- Up to $2,400 of an equity interest in a vehicle
- Social Security payments
- Disability benefits
- Unemployment benefits
- Workman's compensation
- Alimony, maintenance or support
- Rights in a pension plan
The methods for calculating the maximum wage garnishment can be found at 735 ILCS 5/12-803. Only part of a judgment debtor's wages may be garnished per pay period. The debtor's minimum take home pay is $371.25. If the debtor earns more than this, a judgment creditor may garnish either 15% of the debtor's weekly gross wages, or the amount of take home pay above, 45 times the state minimum wage which is currently $8.25 per hour, whichever is less.
Four important things to know about citation to discover assets
- This is a court-ordered appearance. Failure to show up and answer the questions can result in arrest, “body attachment” and a finding of contempt of court against the debtor. The sheriff may bring the debtor directly to court, or the debtor may be jailed until he or she appears and provides answers to the citation. If the debtor is jailed for failure to appear, the debtor may be ordered to pay a bond up to the amount of the judgment in order to be released. Although the court or collection attorney may pressure a debtor to relinquish the bond to pay the debt, the debtor still may assert exemption rights to those funds.
- A citation to discover assets should never be ignored. In some counties, a “body attachment” order is entered on the day the debtor fails to appear. In other counties, the practice is for the court to issue a “Rule To Show Cause” to be personally served on the debtor, directing the debtor to appear and show cause, or explain, why they should not be held in contempt for failing to answer the citation.
- The consumer is under oath when answering questions. The debtor has to be truthful when answering questions about income and assets. Lying under oath is perjury.
- Turn-over orders should not affect exempt income or property. The debtor should know the debtor's exemption rights and should tell the judge what property is exempt, to make sure that exempt income property is not included in any turn-over order. At any citation hearing where the consumer asks for a declaration that certain income or assets are exempt, the court must make a determination whether that income or property is or is not exempt.
- Be careful about agreeing to a court-ordered payment plan. The creditor or his attorney may try to get the debtor to agree to a payment or installment plan, and may try to have that agreement formalized by court order. A consumer should be very careful about making such an agreement, and should not do so unless absolutely certain that he can keep up with the payments. If he fails to make good on a court-ordered payment plan which he agreed to, he may possibly be held in contempt of court and jailed. If all of the debtor's income is exempt, failure to pay should not be sanctonable, but debtor must notify the court and assert his exemptions.
Citation to discover assets held by third parties
Citations to discover assets can also be served on third parties who may be holding some of the debtor’s assets. For example, this might be a bank where the debtor has an account or an insurance company which owes the debtor on a claim. Any third party served with a citation must also come in for an examination and be subject to a turn-over order.
If the creditor serves a citation on any third party, the consumer must be given a special notice that tells when to come to court for this proceeding and explains exemption rights and how to assert them at the hearing. By law, no turn-over order can be entered directing a third party to turn over the debtor’s assets unless there is proof in the court record that the debtor was properly served with the citation and with a copy of the special notice about exemption rights.
When a third party receives the citation, it must "freeze" all assets which are not exempt under the law. The third party should not send any money to the creditor until it receives a court order or turn-over order to do so. The consumer should go to court to assert exemption rights whenever a third party has frozen "exempt" assets or there is a possibility that exempt assets might get turned over at a citation hearing.
New federal regulations as of May 1, 2011 prohibit banks from freezing the last 2 months’ electronic direct deposits of Social Security or other exempt federal benefits. Banks may charge the account holder a garnishment fee, if provided in the account agreement and customarily charged to other account holders, but only from funds in excess of the protected amount. The bank may also charge fees for overdrafts and similar customary charges, even from protected funds.
A judgment debtor still has all applicable exemption rights to additional funds in the account above the amount of the last two months of electronic direct deposit federal benefits, but will have to go to court to assert those exemptions.