A Judgment Lien Must Precede a Debt Foreclosure
Before a debt collector can hope to seize a home for unpaid debts, it must first be awarded a judgment in court. It must then file with the appropriate departments to secure a property lien (See Avoid a Default Judgment).
Once a property lien has been placed on the debtor’s home, he may not receive any proceeds from the sale of the property without first paying the lien. Most states have a statute of limitations that sets a time limit on how long a property lien can be enforced. After the statute of limitations has expired, the judgment lien is no longer valid and the creditor must provide the debtor with a statement of release.
It must be noted, however, that the U.S. government is an exception to the judgment clause. A government lien may be placed on a home at any time without a court judgment (See Government Garnishment Laws).
Enforcing the Property Lien
A judgment creditor who wishes to initiate foreclosure proceedings against a debtor must file for a Writ of Execution at the courthouse where the original lawsuit was filed. The U.S. Marshals Service defines a Writ of Execution as “a process issued by the court directing the U.S. Marshal to enforce and satisfy a judgment for payment of money”.
The county sheriff will then deliver the Writ of Execution to the debtor. In most cases, the Writ of Execution will give the debtor a grace period in which he can pay off the judgment lien and avoid a debt foreclosure. If the lien is not released, the court will issue a date of sale for the property.
The Federal Trade Commission, in its fact sheet “Knee Deep in Debt”, warns consumers that the idea that a bankruptcy will erase a property lien simply isn’t valid. If a creditor holds a lien against a home that is unpaid, a bankruptcy - even a Chapter 13 bankruptcy - will usually not allow the individual to keep the asset.
Foreclosure and the Recovery of the Unpaid Debt
Upon the date of sale set by the court, the property will be sold to satisfy the collection agency’s lien. A debt foreclosure mirrors a standard mortgage foreclosure in that the property must be advertised in the newspaper for a preset period of time, all other lien holders must be notified, and the auction typically takes place on the steps of the court house.
Once the home is sold, liens will be paid off in the order in which they were filed. If there is a mortgage lien on the home, the mortgage takes priority over the other liens. If there is money left over after all of the homeowner’s property liens have been satisfied, the remainder of the funds will be remanded to him.
How Likely is a Collection Agency to Take a Home?
Fortunately, few debtors have to experience the trauma of a debt foreclosure. While the majority of states allow property liens for unpaid debt, many do not permit a creditor to force the homeowner into an early sale. It must be noted, however, that while numerous protections may exist for a debtor’s primary residence, if he owns a vacation home or investment property, that additional property is unlikely to enjoy the same legal protections.
Additional reasons that a collection agency may decide not to pursue a debt foreclosure are:
- The debtor owes more on the home than it is worth. Because the mortgage will be paid off first, this leaves no additional funds to pay the judgment.
- The property has additional liens that take priority over the collection lien. This also, could leave the debt collector with nothing to collect
- The cost of executing the foreclosure is greater than the amount of the judgment. A creditor will rarely be based in an individual’s area and thus will have to hire someone to take care of every step of the process. The expense of doing so can be substantial.
Most consumers shouldn’t worry about losing their homes over an unpaid credit card debt, medical debt or collection account. It is, however, a possibility that individuals should prepare for - even if it is unlikely to occur.