If you’re hurting financially and getting pressured to sell your home, first get bankruptcy advice to potentially save you lots of money.
Do you have serious financial pressures inducing you to sell your home? Those pressures may be from your mortgage lender itself or other home-related debts like property taxes, a second mortgage, or some other creditor that has put a lien on the home, such as the IRS or your state income tax agency. Or you may have other debts not related to your home but which put your home in jeopardy because they suck money away from your mortgage payments.
So these pressures may be tempting you to hurriedly sell your home, or to just give it up to your mortgage lender. But if you rush to sell your home (or surrender it) you could lose out on the opportunity to keep it through the tools of bankruptcy. Some of those tools may even create equity in your home, making it economically more worthwhile to save. Or maybe you would be enabled to still sell it, but do so later (even a couple years later) at a higher price and/or when the timing is better for you.
Our next few blog posts will go through some of the major ways bankruptcy can save you money, sometimes a tremendous amount of money, on your home. The first way, for today’s blog post, involves judgment liens on the title of your home.
Being Saddled with a Judgment Lien
If you have been sued by a creditor (or, for that matter, by anybody with a claim against you), and you didn’t win the lawsuit or pay off the obligation, most likely a judgment was entered against you. In some situations, you might not even realize or remember that this had happened to you. It may have been many years ago, potentially even before you bought your home, and the judgment lien may have attached after you bought the home.
Even if you did deal with it at the time and settled the matter and are making payments under an agreement with the creditor, most likely a judgment was still entered against you in case you didn’t end up paying as agreed.
Either way, the judgment is very likely a lien against your home. That lien amount is often substantially more than the amount you thought you owed the creditor, as a result of extra costs that the creditor stacks onto the basic debt—for court filing fees, attorney fees, late charges, and continuously accruing interest.
Potential Future Judgment Liens
Even if you haven’t been sued by a creditor, if you are behind on payments, or the debt was sent to collections, a creditor or its collection agency may sue you in the near future. That creditor could get a judgment against you and place a lien on your home’s title. If you’re in the process of selling your home, this lien could hit the title before the closing of your home sale.
Paying a Judgment Lien Out of Home Sale Proceeds
In all these situations, the judgment lien generally has to be paid in full before the house can be sold. If, as usual, the judgment is paid out of the proceeds of the sale, this dollar for dollar reduces the amount you receive out of the sale. And the lien could reduce the amount of money available to go to more important debts that you intended to pay out of the sale proceeds, such as property or income taxes, or child or spousal support.
If there are not enough sale proceeds to pay the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. To the extent that you don’t pay it in full, you would likely continue owing the balance, and need to pay it at some point. Finally, if your home does not sell for enough money to pay off the judgment creditor and it won’t settle for less, the judgment lien could jeopardize your sale.
Don’t Pay a Judgment Lien, But Instead “Avoid” the Lien
In contrast, by filing either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” you can often “avoid”—permanently get rid of—that judgment lien and “discharge”—legally write off—the debt that resulted in the judgment. That would allow you to sell the home without paying anything on that debt.
The condition you have to meet to void the entire judgment lien is that all of this lien needs to eat into the equity in your home that would otherwise be protected by the homestead exemption.
To explain by example, assume that except for the judgment against you, your home would have $25,000 of equity (say, a $250,000 home with a mortgage of $225,000). But you have a judgment against you for $10,000, resulting in a judgment lien in that amount on your home title. Assume that in your state you’re entitled to a homestead exemption of $50,000 of home value or equity. So the $10,000 judgment lien is eating into that $25,000 of equity that you would have without the judgment, all of which is protected by the homestead exemption. As a result, in bankruptcy that $10,000 judgment lien would be “avoided”—taken off the home’s title—and the underlying debt would be discharged—forever forgiven—saving you $10,000 and giving your home that much more equity.
Clearly, if you have a judgment against you and a judgment lien against your home, you should be talking to a bankruptcy attorney. And not selling the home out of desperation to pay that judgment lien and your other debts.