Can A Creditor Put A Lien On My House For Unsecured Debt?

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manny

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Published on September 16, 2020

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If you’re drowning in credit card debt and your phone won’t stop ringing because of calls from debt collection agencies, you might be worried about whether these creditors can seize your property. One popular threat used by collection agents is that they will take your house if you don’t pay the debt by putting a lien on it. If you’re not familiar with how this process works, it can be very stressful. It’s just natural to feel anxious about finding yourself homeless because you maxed out your credit cards and failed to pay.

But is it really possible for unsecured creditors to put a lien in your house? The short answer to this question is yes, it is possible for unsecured creditors to put a lien on your house. However, this is not an instant process. Unsecured creditors have to go through a long route before you get thrown out of your house. 

To understand this process better, it is important to learn more about what unsecured debts and liens are, as well as the lien process in case you have unsecured debt.

What are Unsecured Debts?

Unsecured debts are types of debts that do not require collateral. This means that when you borrow the money, you are not promising to provide any of your properties in return in case you are unable to pay the debt. The only promise is that you will pay back what you owe. Common examples of unsecured debts are credit card bills, medical bills, utility bills, and personal loans not backed by any assets.

Unsecured debts are usually considered as non-priority debts. In the event of a bankruptcy, most unsecured debts like credit card bills are wiped out. In many cases, bankruptcy trustees only pay unsecured creditors after all priority creditors have been paid.  

On the contrary, secured debts are debts wherein you pledge your assets as a guarantee to the lender. Mortgages are examples of secured debt. If you take a house mortgage, for example, the lender has the right to take back the house if you are unable to make the regular payments. A car title loan is another example of a secured debt. 

So, if you did not sign off anything when you took out your loan or pledge any of your assets – that is considered unsecured debt. However, if you took a loan and put up your property title as collateral, then that is a secured debt.

What Does a Lien on a Property Mean?

A lien on a property means that someone else besides you has a legal claim on your property. Once you sell your house, the proceeds will have to be used to pay off these liens before you get any money. The worst case scenario is that the lien holder could also force you to sell the property so they can recoup the money you owe them.

A lien can be voluntary or involuntary on your part. When you take out a mortgage to buy a new house, the lender will automatically have a lien on your property. This is referred to as a “voluntary lien” because in signing the mortgage contract, you agreed that if you are unable to pay your mortgage payments, the lender can foreclose on your property. After you paid off all your mortgage, this mortgage lien will be removed.

Another type of voluntary lien is if you put up your house as collateral in securing a loan. To do this, there should not be any other liens on your property or the equity that you own is much higher than the loan amount. This guarantees the lender a right to your property if you are unable to pay the debt.

An involuntary lien, on the other hand, is a type of lien that is placed on the property without the agreement of the owner. Creditors often place these liens on a property to collect the debt owed to them. For unsecured creditors, this lien is often referred to as a “judgment lien” because creditors need to secure a court ruling before they can enforce this action.

Can a Creditor Put a Lien on my House for Unsecured Debt?

If you have unsecured debts like credit card debts, you might be wondering whether it’s possible for you to lose your house if you don’t pay these debts. Will the credit card company be able to put a lien to your house?

As we’ve already answered earlier in the article, YES, creditors can put a lien on your house for unsecured debt but they have to go through a judgment process. This means that they have to go to court, sue you, and win the case before they can have the right to place a lien in your house.

So, what is the process that the creditor has to go through to put a lien on your property? Let’s say you have unpaid credit card debt, this is the usual process they would have to go through.

After missing your credit card payments, you will typically receive mails or emails notifying you that you have missed your payments. You will also be charged late fees and interests.

If you still haven’t paid your debt, you will start receiving phone calls from the creditor’s in-house collection department. After a few months (usually 6 months), the non-payment of the debt will force the creditor to forward your debt to a debt collection agency. The debt collection agents will then phone you to pay the debt.

If the debt collection agents are not successful, the creditor can file a “complaint” against you in court to get you to pay the money. In simple terms, the creditor is now suing you in court. When this happens, you will receive a “summons” from the court regarding the complaint.

Once you receive the summons, you have to answer by filing an answer form. In your response, you can either admit, deny, or lack knowledge regarding the debt. You can do this yourself or consult a lawyer on your next steps. Responding to a summons for debt is very important because you don’t want to get a default judgment.  A default judgment happens when you ignore the summons and the judge rules in favor of the creditor because you did not show up.

The next step is participating in the court proceedings. At this point, you can dispute the claims of the creditors if the debt amount is incorrect or show proof that you have paid the debt. If you are unaware of the debt and think it’s a mistake, you can ask the creditor for proof. If the debt is yours, you can also try to settle the debt out of court and renegotiate the total amount of the debt.

If you do not settle and renegotiate, the court will issue a judgment on who wins the case. If the creditor wins, they can request the court for you to declare your financial information, bank accounts, and assets. You would have to declare this truthfully to avoid perjury. If the creditor was not previously aware that you own a house, this will be the point where they will discover this information.

If you own a house, the creditor can use this judgment to place a lien on to your house. If you sell the house, they can get paid the amount before you get paid. They can also force you to sell the house, however, this will also depend whether you own 100% equity on the property, if you’re still paying the mortgage or if you’re covered by the homestead exemption.

As illustrated above, the creditor has to go through all these steps before they can place a lien on your house. So, if a collection agent calls you on the phone and threatens you that they will put a lien on your house if you do not pay your debts next week, then that is impossible unless they already won a case against you.

How does Homestead Exemption Work?

If you own a house with a market value of $400,000, and you still owe $350,000 in mortgage payments, your home equity is $50,000. If you have credit card debts amounting to $20,000, the creditor can force you to sell the property to recover that amount against your $50,000 home equity. In this scenario, you’ll only be left with around $30,000. But depending on the state where you live, this can be avoided.

For example, if you live in California, the homestead exemption for a single owner is $75,000. This is the amount protected by law that is exempt from being collected by the creditor. Since your home equity of $50,000 falls below the exempt amount, that means the creditor cannot force you to sell the home. 

If you live in states that have unlimited homestead exemption like Texas, Florida, Iowa, and Kansas, there is no way an unsecured creditor can force you to sell your home. Even if you have 100% equity in your house, it will be exempt from claims by unsecured creditors, as long as you did not obtain the house through fraud.

However, if you live in a state where there are no homestead exemptions or the homestead exemption is low, the creditor could force you to sell your home. For example, if you live in Illinois, the homestead exemption is only $15,000. This means that there will still be $35,000 left from your equity that the creditor can chase. As long as you don’t have any other liens on the property, this may encourage the creditor to force you to sell the house.

Can a Credit Card Company Put a Lien on my House Without Me Knowing?

Many people worry that unsecured creditors would put a lien on their property without them knowing. As discussed earlier, the creditor has to file the lawsuit, go through court proceedings, and win a judgment before they can acquire the right to place a lien on your property. In every step of the process, you will be notified by the courts by sending you summons and notices.

If you received these notices and you chose to ignore them, this could result in a default judgment where the creditor wins the lawsuit. You will also be notified if a lien was placed on your house. This means that being unaware of a lien will only be possible if you have accidentally missed all the summons and court documents that have been sent to you regarding the lawsuit. If you are planning on selling your home, you can first check in your county or city’s recording office if there are liens on your property.

Can I be Thrown Out of my House for Unsecured Debt?

While it is possible for creditors to place a lien on your house for unsecured debt, throwing you out of the house is another matter altogether. This usually happens when the creditor forces you to sell the property to recover the debt you owe.

Listing a house and selling it can be a difficult and costly process, so unless the creditor is guaranteed to get money back from the sale, they will not force you to sell or auction the house. They usually wait until you decide to sell the house yourself. This is because even if they have a judgment against you, there are factors that could deter them from selling your house. For example, if there are several liens on the house, these liens will be considered “senior liens” and will be prioritized during the repayment process. Unsecured creditors may not be willing to go through the selling process if they are last on the list to be paid.

Another critical factor is Homestead Exemption. Depending on the state you live in, you can file for homestead exemption wherein a certain value of your home’s equity is protected from unsecured creditors. This exemption can be filed if you live in the house and you can prove that it is your primary residence.

How Do You Protect Your House Against a Lien?

To protect your home against a lien from unsecured creditors, you should not ignore summons from the court. If you receive notices of a lawsuit, you have to respond and participate. If you ignore, the other party automatically wins and will have the right to place a lien.

If your property qualifies for homestead exemption, file for this exemption. In some states, this exemption is automatic but it is safer to file for this exemption beforehand to avoid liens.

One way on how to stop a lien on your property is to speak with your creditors. Try to settle with them before they win a judgment against you. You can renegotiate a payment plan to avoid a judgment.

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