Protecting Your Home from Seizure
Your home is at risk of foreclosure if you do not keep up on mortgage payments. Your home is also at risk of being sold if you owe a judgment debt, but that risk is much smaller. When a creditor obtains a court judgment on a debt, even just credit card or medical debt, the creditor can then put a lien on your home for the amount of the debt. With a lien in place, the creditor can then force a sale of your home or the creditor can simply hold onto its lien and wait for you to sell the home before trying to collect on the lien.
In some states, if husband and wife own a home jointly, the home cannot be seized to pay the debts that only one spouse owes. On the other hand, if both spouses are obligated on the debt, the judgment creditor can force a sale.
Most states have a homestead exemption that protects your home from being sold to pay a judgment debt as long as your equity in the home is less than a certain amount. While some states protect $100,000 or more, many states protect less. And few states completely prohibit a creditor from forcing the sale of your home to pay a judgment debt, no matter how much the home is worth.
A homestead exemption can protect your home from seizure based on a judgment debt. However, a homestead exemption does not protect you if you are in default on a first or second mortgage, on a home equity line of credit, or on any other debt if your home is collateral for that debt. In addition, in some states, to benefit from a homestead exemption, you must file a declaration of homestead with your registry of deeds office. In a few states, the declaration must be filed before the credit is granted. If you live in a state where a declaration is required, you should always file it as early as possible. In other states, the protection is automatic.
The homestead exemption is a powerful protection. The exemption’s dollar amount applies not to your home’s value, but instead to the equity in your home—home equity is your home’s present value minus the amount you owe on your first and second mortgages as well as any home equity lines of credit or other loans if your home is collateral for the loan.
Mr. J lives in a state with a homestead exemption of $75,000.
His home is worth $200,000.
He has $100,000 in principal still due on his first mortgage.
And Mr. J has $25,000 owed on a home equity loan.
The total secured debt on his property = $125,000.
In this case Mr. J’s equity in his home is $200,000 - $125,000 = $75,000.
Since the homestead exemption is $75,000, his home is fully protected. A creditor cannot force the home to be sold to pay a judgment debt.
If Mr. J’s home increases in value to $220,000, and if the total secured debt on his property stays the same, then his equity increases to $220,000 - $125,000 = $95,000. The homestead exemption of $75,000 no longer protects all of Mr. J’s equity. The creditor can force a sale.
The first $100,000 from the sale goes to pay off the first mortgage holder. The next $25,000 pays off the home equity loan. Mr. J. keeps $75,000, the amount of the homestead exemption. After these deductions from the sale price, the judgment creditor gets whatever is left, up to the amount of the debt. If there are still any sale proceeds left over, those go to Mr. J.
Even though the home is worth $220,000, the creditor under such facts will probably not try to sell the home to satisfy its lien. If the forced sale of the home only brings in $210,000 and selling expenses are $10,000, then there will be nothing left for the judgment creditor. The judgment creditor instead may wait until Mr. J sells the property, since the judgment creditor’s lien stays on the home for many years. When Mr. J sells his home, anything Mr. J clears over $75,000 (after paying off the first mortgage and home equity line of credit) goes to pay off the judgment creditor’s lien, up to the amount of the debt.
One possible way of getting rid of judgment liens is to file for bankruptcy. To the extent the property is exempt when you file for bankruptcy, the lien can be permanently removed. Bankruptcy is discussed in Chapters 24 and 25.