If you go to court and get a money judgment against someone (this person is called the judgment debtor), and that person doesn't pay the judgment, you can use a real estate lien to try to collect. Here's how the lien works: You record a lien against the judgment debtor's property and if he or she then sells or refinances the property, you get paid from the proceeds. Not all sales and refinances will yield money for you, however.
Read on to learn the pros and cons of using a real estate lien to collect a judgment, and the liklihood you'll get paid from the proceeds of a real estate sale.
How Does a Real Estate Lien Work?
When you record a lien against the judgment debtor's property, you have notified the world that the property owner owes you money. The lien attaches to the legal title of the property. No law requires that liens be removed before title to property is sold or transferred. But if the buyer needs financing or wants clear title, the lien will have to be cleared up. In the real world, this means that when the property is sold or refinanced, your lien will get paid from the proceeds so that title is clear.
However, if many creditors are trying to collect a judgment through liens, you may find yourself at the end of a very long line. If there's not enough money to cover the claims of all lienholders, whether you get paid depends o whether other lienholders placed liens or mortgages on the property before you did. (The first to place the liens are the first to get paid.)
For this reason, it's a good idea to check when you record your lien whether other liens already exist on the property. If there are other liens, still place yours, but seriously consider pursuing other strategies. (For additional collection strategies, read more about Collecting a Judgment.)
How to Get a Real Estate Lien
The procedures you must follow to create a lien against the judgment debtor's property vary by state and locality. Usually, however, you register your judgment with the land records office in the county where the real estate is located. To find out what you need to do in your county, contact your local land records office.
If the real estate is jointly owned by a married couple, your right to impose a lien might be affected. To learn more, see Real Estate Liens on Jointly Owned Property.)
Advantages of Property Liens in Collecting Judgments
Here are a few advantages to using property liens to collect a judgment:
- You are unlikely to push the debtor into bankruptcy. In general, when you collect a court judgment, you want to avoid aggressive collection measures that may push the debtor into bankruptcy. This is because most types of debts are wiped out in bankruptcy -- so you'll be left with nothing. Placing liens on property is a good way to minimize this risk.
- They are cheap and easy to create. Collecting a judgment through liens involves little effort or expense.
Disadvantages of Using Real Estate Liens
Here are some of the downsides to real estate liens:
It Could Take a Long Time to Collect
You might have to wait a very long time before the judgment debrors sells or refinances the property. And if the property is transferred without the lien being paid off, it simply remains on the property and the new owner of the property has to deal with it. This means that in transfers between relatives, the new owner may take title to the property, liens and all.
You Only Get Paid if There Is Enough Money From the Sale
As mentioned, you will be paid after the owner of the real estate sells or refinances her property if there is sufficient money available after the mortgage lender and anyone who has recorded a lien ahead of you is paid. For instance, if the debtor falls behind on her monthly payments and the mortgage lender forecloses on the property, your chances of collecting on the lien are low, given that a foreclosure sale rarely brings in enough to pay the amount owed to the mortgage lender.
The Homestead Exemption Might Protect the Debtor's Equity
You face another potential limitation if you attach a real estate lien to the debtor's primary home. In most states, when a sale of property is forced to pay off foreclosed mortgages or judgment liens, the law provides homeowners with the right to protect from collection a portion of the equity in their residence. This exemption, called a homestead, runs from as little as $7,500 in some states to an unlimited amount in other states. (To find the homestead exemption amounts in each of the 50 states, see our Homestead Exemption topic page.)
This means you don't get paid until after the mortgage is paid off, the homeowner gets the exemption amount, and anyone who recorded a lien ahead of you is paid. If there's enough equity in the property for you to get paid, you will. But don't count on it.
If the Debtor Declares Bankruptcy, the Lien Might be Wiped Out
You face another possible limitation if the debtor declares bankruptcy. Bankruptcy gives debtors various ways to deal with liens in bankruptcy. One is called "lien avoidance," and it allows a debtor to wipe out a lien completely. Lien avoidance is available on judgment liens to the extent the lien impairs the debtor's homestead exemption. This means that if no equity remains after the mortgage (including any second mortgage) and the homestead exemption is deducted, the debtor will likely be able to eliminate your judgment lien. (To learn more about how this works, see Avoiding Liens in Chapter 7 Bankruptcy.)
State Laws on Judgment Liens
To learn about the relevant laws in your state, choose from the list below.
For more information on collecting court judgments, see Everybody's Guide to Small Claims Court, by Ralph Warner (Nolo).