With the increased wealth of property ownership comes increased responsibility -- not least to debts incurred in other areas of life. When people don't own property, there's only so far that creditors can go to look for money to pay debts. But when people do own, then some creditors can sue and potentially obtain a judgment lien, a legal claim that entitles them to the funds from the sale of a property. And since liens are generally on public record, the information about the debt will be available to anyone who decides to look. If a person has owned a property long enough to have built up substantial equity, then they potentially have a lot to lose in deciding not to pay a debt.
What is a judgment lien?
A judgment lien is a non-consensual claim on a piece of real property the debtor owns. It results from a creditor winning a lawsuit pertaining to funds owed them by the debtor. If an entity wins a judgment lien against someone who owns a piece of real estate, they don’t necessarily get the property; they just become legally entitled to funds resulting from the sale of it after the mortgage is paid.
Why would someone seek a judgment lien?
Someone would seek a judgment lien if other ways of collecting on a debt haven't worked. If a person owes substantial money, and their savings is drained, a creditor might take them to court seeking to obtain a judgment lien on their real estate -- and, in some states, on other real property they own. A judgment lien can often be seen as a way to force a debtor into paying, not necessarily to actually seize their real estate. That is too much trouble to go to, unless the owner has substantial equity.
Different types of liens
They're all bad… but some are easier to fight than others.
The difference between a judgment lien and a property lien
One major difference is that a property lien can actually be on secured debt; that is, it's set up intentionally with the consent of the property owner. This is typically done at the time the borrower is attempting to get a loan or buy something and is willing to use their home as collateral. Ten years later when they're unable to pay, the creditor can call in a property lien without needing to go to court.
Difference between a judgment lien and a mechanic's lien
A mechanic's lien is issued specifically by contractors and material suppliers who did work on a house and claim they weren't paid for it. These types of liens don't necessitate going to court. Their similarity to judgment liens is that they activate, so to speak, when a real property owner sells the property and/or attempts to access equity on it.
Difference between judgment lien and tax lien
A tax lien is filed on property by the IRS, the city, or county if a property owner has accrued a tax debt. Typically, the government will look for other ways to collect the debt before filing -- and even if a lien is filed, the government will not necessarily seize property in order to satisfy it. The seizure and sale of property comes with a tax levy, which is the next major escalation on a lien.
The judgment lien process
In order to obtain a judgment lien, a creditor must take the person who owes them money to court and win. In winning, the creditor wins a money judgment: an official note from the court that states the losing party owes them a debt of a certain amount. After that, the judgment creditor can look for property to seize as payment. Real estate is often at the bottom of the list of what creditors choose to seize, since they can't just take the property in full; rather, they have to collect from whatever funds are left after the property is sold and the lender gets its due.
Where is a judgment recorded?
A judgment is recorded in the office of the county Recorder of Deeds, aka the County Clerk's office, after the lawsuit is finished in court. It stays on file alongside the real property records for the real estate property named in the lien.
When do judgment liens potentially affect the debtor?
Because creditors rarely seize and sell properties, judgment liens tend to affect a debtor when they attempt to sell or refinance the property. This might take years and may come as an even nastier shock to the property owner if they've purchased their property after the lien was recorded -- because liens can in fact attach to real property that was acquired after a debtor had a judgment lien filed against them.
There are some instances where a judgment lien will affect a debtor when they're not planning to sell, because the creditor has determined the judgment debtor has enough equity in the property to make it worth forcing a sale, paying back the bank, and then getting their money from the remaining proceeds.
Judgment liens and property in different states
Typically a judgment lien is valid in one state but honored and enforced across all states. So if the debtor is in one state but has property in another state, and the creditor decides to come after them, the creditor needs to transfer the judgment using the Unified Enforcement of Foreign Judgments Act (UEFJA). After this is done, they can collect on the judgment in the state where the property is located.
What should you do if a judgment lien is filed on your property?
Ideally, no one wants to get to a point where a judgment lien is filed. This isn't a tax situation or contractor dispute. Debtors get plenty of warning before a lawsuit is on the books and, once it's happening, have multiple opportunities to defend it in court.
If a judgment lien is filed on a piece of property, the debtor should make a stronger effort than ever before to pay off their debt to the creditor. If paying the amount outright isn't feasible, it's worthwhile to try to negotiate a lower settlement or a payment plan. Everything should be taken very seriously, as once that judgment lien is in hand, the creditor does hold the last card, so to speak. Not only do they get many years to collect their funds from whenever the property is finally sold, but that judgment appears as a cloud on the title until it is removed from the file.
The judgment lien process -- getting one removed
The most failsafe way to get a judgment lien removed is to pay the debt. However, there are circumstances where it'll work for the debtor to ask the court to remove the lien, based on facts about the property itself.
Filing bankruptcy can remove liens from a title, but it won't necessarily erase the associated debt.
How long do judgment liens last?
The length of time that a judgment lien lasts varies by state but can range anywhere from five to 20 years. Ten years is an accurate amount of time to assume a judgment lien will last.
A note on homestead laws
Several states have homestead exemptions for primary residences protecting the equity in them from judgment liens. Specifics vary from state to state, with some states exempting unlimited equity and others not protecting equity at all. Some states have a minimum length of time that people need to live in the state, and most states don't allow protection on properties that became eligible after judgments were incurred. Also worth noting is that in order for the equity in a property to be exempt, it needs to be the primary residence of the debtor.
Note, you can't be protected by homestead law if your primary residence is the one that's fallen severely behind on payments
Judgment liens -- the bottom line
While judgment liens are used as a threat as much as a collection tool, they are still absolutely something to be avoided. Yes, they are oftentimes a great inconvenience for the creditor, but if someone is willing to take another party to court to collect on a debt, they may very well be ready to go the distance and force the sale of a property.