It’s often smarter to avoid letting a creditor or collector get a judgment against you by filing bankruptcy before that can happen.
The Understandable Scenario
It’s very easy to get a judgment against you. Acting with what seems like common sense can easily get you there.
You’ve fallen behind on a debt because you simply didn’t have the money to pay it. You eventually get served with papers saying that you are being sued and that you need to pay the entire balance. You certainly don’t have the money to pay that. In addition, you know you owe the debt so you are not disputing that you do. As a result you don’t see any point to contacting the creditor or to responding to the lawsuit. Since you don’t respond by the stated deadline (usually 30 days after you receive the papers), a judgment is entered against you. You may well not even realize it because usually you are not specifically informed that it has happened.
A Judgment Means a Judgment Lien on Your Real Estate
In Oregon, a judgment entered against you creates a judgment lien against any real estate—including your home—that you own anywhere in the county where the judgment was entered. Such a judgment lien can result in the forced sale of that real estate in order to pay the judgment amount.
But even if that does not happen, if you wanted to sell or refinance the real estate, the lien would usually have to be paid off. That could jeopardize the sale or refinance altogether, significantly harming you financially. Or even if the sale or refinance could still occur, paying off the judgment lien would reduce the money that would otherwise come to you or would pay other liens that you wanted to be paid.
The Judgment Lien Can Attach to Your Real Estate Anywhere
If you do not own real estate in the county that you were sued, but do so somewhere else, the creditor can “transcribe” the judgment to the county where your real estate is located. That transcribed judgment then creates a judgment lien against your real estate in that county.
Your real estate can even be in another state. The creditor can register a “foreign” (out-of-state) judgment from Oregon in that other state, and that judgment then acts like a judgment created in that state, and can create a judgment lien by the procedures available under that state’s laws.
So no matter where you own real estate—again, your residence or any other kind of real estate—a judgment anywhere would likely turn into a judgment lien attached to that real estate.
The Judgment Lien Can Attach to Partial Interests in Real Estate
You may figure this can’t hurt you because you don’t own a home, and certainly don’t own any other real estate. But be careful. If a parent and grandparent dies, and you and your siblings or some other group of relatives inherit some right to some real estate, a judgment lien could attach to your interest in that real estate. Or if you get married to a spouse with real estate, or you get divorced and acquire some right to real estate, a judgment lien could unexpectedly attach to any such real estate.
“Execution” on the Judgment Lien
The creditor with a judgment against you can, under certain circumstances, get the court to authorize the sheriff to sell your real estate, including your home, to pay the judgment.
Candidly, this is not often done for many practical reasons. The creditor must jump through a bunch of hoops to get court authorization, so the process can be relatively expensive for the creditor. As a result creditors first look to less expensive and less risky procedures—like garnishment of wages and accounts—when those are available. But it is important to remember that this collection method of executing on real estate is available to creditors, and may be used against you when you least expect it.
Preventing a Judgment Lien from Attaching to Your Real Estate
In almost all circumstances, if you are sued by an unsecured creditor (one holding no collateral) your filing of a bankruptcy case will stop the lawsuit before a judgment is entered. A bankruptcy stops the lawsuit in its tracks, and the creditor cannot continue the lawsuit or enter a judgment without the bankruptcy court’s permission. Usually the creditor cannot get that permission. So no judgment is entered, and no judgment lien is created. Usually the debt that was the purpose of the lawsuit is discharged (legally written off) through the bankruptcy case, which ends the entire problem.
So, by filing bankruptcy you usually avoid having to pay any or at least most of the underlying debt. You avoid having to deal with the judgment lien if you try to sell or refinance the real estate. And you avoid the risk of losing your real estate from its forced sale upon execution of the judgment.