Money & Debt

The following question was originally submitted to John Roska, a lawyer and writer for the weekly column "The Law Q&A" in the Champaign News Gazette. The article has been updated to include changes in the law and additional information.

Question

I got sued and had a judgment entered against me in Small Claims court. Now they’ve recorded that judgment as a lien on my real estate. Can I lose my house for the debt?

Answer

In theory, maybe. In practice, no. Creditors almost never sell someone’s house to repay a debt. You don’t have much to worry about.

That is true for debts that weren’t used to buy the house. It’s different with mortgages. That’s because a mortgage is a voluntary lien, that you agree to. 

You don’t agree to the lien that comes from a court judgment in a regular collection case. It’s involuntary.

Both kinds of liens can be foreclosed upon. But because it’s not something you consented to, foreclosing on an involuntary judicial lien is much more complicated. That is why it is rarely done. 

The homestead exemption discussed in a recent column is one complication. For someone who’s single, it exempts from collection $15,000 of equity in their residence. Married couples double that protection to $30,000.

That means the homeowners would get the first $15,000 of $30,000 of the net proceeds from any foreclosure on a judgment lien, before the creditor gets the first dime. By keeping some money away from creditors, the homestead exemption helps keep a roof over debtors’ heads.

That is why the homestead exemption creates a $15,000 or $30,000 hurdle to get over for the creditor to get paid. If there’s not that kind of equity in the house, there’s no point in foreclosing on the judgment lien.

Even if there is equity in the house over those homestead exemption amounts, other complications make foreclosing on a judgment lien impractical.  At a minimum, the creditor would have to pay:

• to publish notice of the sale in a newspaper, and
• then pay the sheriff’s $600 fee for holding a sale.

They’d better pay a lawyer, too, since the procedure is full of pitfalls that can result in an invalid sale.

Following the procedures correctly requires giving the debtor 6 months after the sale to redeem the property. That gives the debtor additional time to pay off the debt, and avoid the loss of their home, but also prolongs the creditor’s wait and uncertainty.

Plus, at any time, the debtor can play the ultimate trump card and file for bankruptcy. A careful creditor who successfully navigates through the various hurdles and pitfalls could still end up empty-handed.

For those reasons, and because many creditors just don’t want the bad PR that comes from taking people’s homes, creditors rarely try to foreclose on judgment liens.

That doesn’t mean a judicial lien is worthless. It’s real value is as a “cloud on title,” which must be removed before anyone can get clear title.

In most cases, a judgment lien just sits there until the property is sold or transferred. Then, to release the lien, so the buyer can get clear title, the judgment must be paid off.

So, judgment liens often result in payment, just not through foreclosure. That’s why you generally don’t have to worry you’ll lose your house for a non-mortgage debt.