A debt collector is threatening to sue me and put a lien on my home. Can they really take my property over one debt that I can’t afford to pay? And how would this affect my children if I die and there’s a lien on the property they’re supposed to inherit?
—Margaret B. in Illinois
Eric Olsen, Executive Director of HELPS Nonprofit Law Firm, answers…
Seniors often worry that if they are sued that a judgment could become a lien on their home. They fear that a judgment creditor could take their home. I will explain why this is almost never the case.
Many income sources for seniors are protected
First, seniors often don’t realize that federal and state laws protect their Social Security, almost all pensions, disability, and VA benefits from debt collectors. This income cannot be garnished or taken from them. Thus, it doesn’t need to be used to pay a debt a senior can’t afford to pay.
Because seniors’ income is protected, many credit card companies decide it is not economical to sue seniors for past-due debt in the first place.
Homestead exemptions can help protect your most important asset
For many seniors, their home is their main asset, and they would like their children to have that equity when they pass away. I will explain why – if they are sued – a judgment lien might not be a problem, ways to remove a judgment lien, and how seniors can protect their home equity for their children.
Almost every state has homestead exemption laws that protect a certain amount of equity in the home from creditors.
- Some states like Texas and Oklahoma have unlimited exemptions
- Other states, like California and Florida, have large exemption amounts
- Then other states have very small or no exemptions, like Virginia and Pennsylvania
- Some states also have increased homestead exemptions for seniors
You can learn the amount of your state’s homestead exemption by searching “homestead exemption” and the name of your state. Even if a person has equity in a home over the state homestead exemption, it is not the practice of unsecured consumer judgment creditors to foreclose on a person’s home.
Foreclosure from a judgment lien is extremely unlikely
Before founding HELPS Nonprofit Law Firm I filed around 40,000 bankruptcies. I cannot recall a single instance in nearly 40 years, where a consumer judgment creditor, such as a credit card company, ever attempted to foreclose on a judgment lien.
There are many reasons for this:
- The judgment holder would incur significant attorney fees with no guarantee of a positive result.
- There is always the question of how much equity there is in the home. Any prior mortgage, property taxes, or tax liens would have to be paid first from foreclosure sale proceeds.
- Then a state homestead exemption would have to be paid to the homeowner before a judgment creditor would get anything.
- If a judgment is against only one spouse, a home owned by both husband and wife can prevent a foreclosure.
- Different forms of bankruptcy can stop a judgment lien foreclosure.
Because of these and other reasons, it is the practice of consumer judgment creditors to not foreclose on a judgment lien. Instead, they wait and hope to be paid in the future, perhaps when the home is sold.
Is credit card debt keeping you from success? Learn how to get your debt under control.
How can a judgment lien be removed if one is in place?
Seniors often stop worrying about a judgment lien when they realize it won’t cause them to lose their home. And there are several ways that a judgment lien could be dropped:
1. The lien does not apply to the surviving spouse
Most often, a married couple will own a home together with survivorship rights. If a judgment is against only one spouse, the house automatically goes to the surviving spouse without the judgment lien when that spouse passes away. Some couples calculate one spouse is more likely to pass away first, and the judgment will disappear.
2. Homestead exemption could prevent a lien or remove it
Some states provide that a judgment cannot become a lien on the home unless there is equity over the state’s homestead exemption. Other states have laws to legally remove a judgment lien if the net proceeds upon sale of the home are less than the homestead exemption.
3. The homeowner files bankruptcy
In other states filing bankruptcy can remove a judgment lien.
How can seniors whose only asset is equity in a home protect that equity for their children?
Many seniors believe they can pass the equity in their home to their children with a will or revocable trust. However, for seniors with old debt, a will or trust in some instances is a way to see the children get nothing. Under the terms of the will or trust, all the parents’ debts are paid before the children get anything.
Seniors can always consult with a local attorney. However, many seniors with minimal income can’t afford to consult with an attorney, let alone pay expensive estate planning fees. There is another possible solution for parents.
Adding children to a property deed as joint owners
In most states, a senior or senior couple could consider adding their children to the home’s deed as joint owners together with them, with survivorship rights. The parents are not giving the property to their children. They are merely adding a child or children’s name with them as joint owners for estate purposes. The parents still own the home. When the parents pass away, the home passes to the surviving joint tenants – the children – automatically, without probate or the need for past debt to be paid, except for an outstanding mortgage.
If the parents added children to the deed with survivorship rights before a judgment, the judgment lien would drop off when the parent passes away. Adding children to a deed is not difficult and often a do-it-yourself task. This will preserve the equity in a home for the children. Of course, if the parent needs to sell the home, all joint owners must agree. Existing mortgage agreements may inform your options regarding this process.
What if a senior has a low income with a house payment and debts that they have difficulty paying, but they have significant equity in a home?
In this situation, if the senior homeowner wants to stay in the home, they could consider getting a reverse mortgage.
There is much misinformation about reverse mortgages, but a reverse mortgage can answer prayers for many seniors with a high house payment or low income. A reverse mortgage can pay off an existing mortgage, providing the senior extra income by not making a mortgage payment and often providing a line of credit.
The senior still owns the home and can live in it till they pass away or sell the home if they want, normally only responsible for property taxes and insurance.
How a judgment lien could affect a reverse mortgage
Waiting to get a reverse mortgage after a judgment might prevent a senior from getting a reverse mortgage, require a judgment to be paid, or decrease the amount of money a reverse could provide the senior. Finally, seniors could then investigate their options to add children to the deed after obtaining a reverse mortgage as joint owners.
The bottom line
There are many reasons why a senior doesn’t need to fear a judgment lien. And options to prevent a problem a judgment lien could cause. HELPS is a national charitable nonprofit law firm. We represent lower-income and poor seniors to stop debt collector harassment. We also educate seniors on how to maintain their financial independence. HELPS turns no senior away that that needs the help we provide. Seniors can call HELPS with their questions at (971) 239-5701.
