Property liens are a tool that judgment creditors can utilize to encourage debtors to pay up. Also known as judgment liens in some states, property liens are legal documents that establish a financial interest in a piece of property. They are similar to construction liens and the liens mortgage lenders put on homes they finance.
Establishing a Financial Interest
What does it mean to establish a financial interest in a piece of property? It essentially means laying a legal claim to all or a portion of the value of the attached property. Let’s say you cook out a $100,000 mortgage to purchase your home. You have managed to pay it down to $50,000. The current lien on your home declares that $50,000 of your home’s value belongs to the bank.
A judgment lien works the same way for all intents and purposes. It establishes a legal interest equal to the amount of money owed. If the amount owed is greater than the value of the attached property, the lien establishes complete financial interest. Now let’s talk about what that means practically.
Attaching a property lien to a judgment debtor prevents the debtor from selling or otherwise disposing of the property without settling the debt. When a piece of attached property is sold, the proceeds from that sale go towards settling debts first. If anything remains, it goes back to the debtor. But if sale proceeds are not enough to satisfy his debt, he is still responsible for the remaining balance.
The Pros
There are certain advantages to filing property liens against judgment debtors. First of all, a judgment lien represents a passive means of collection. Once a lien is filed, the creditor can simply wait for the property to be sold or refinanced.
There are other advantages as well:
- If the attached property is valuable enough, the creditor might actually get full payment.
- Judgment liens are typically valid for 7-10 years, making it possible to extend collection efforts substantially.
- Property (real estate) tends to appreciate over time. Appreciation means higher value and a potentially larger payoff.
There is one more big advantage, according to a Salt Lake City, Utah collection agency that does business under the Judgment Collectors brand: most states allow judgment creditors to charge interest for as long as it takes debtors to pay. Relying exclusively on property liens can increase interest charges significantly.
The Cons
For every advantage property liens offer there is an equally compelling disadvantage. And one of the biggest disadvantages is time. A creditor has no way of knowing how long it will take before the debtor attempts to do something with the attached property. So yes, collection could take a decade.
Here are some of the other disadvantages:
- Other liens in the first or second position could limit the amount of money a creditor ultimately gets.
- Homestead exemptions can limit the accessible value of an attached property.
- Recording and enforcing liens requires further legal action, which adds to the creditor’s cost.
It also must be understood that a judgment lien does not equal a guarantee of payment. What if the debtor never sells or refinances the property? In such a case, the judgment lien is rendered moot. A creditor could wait for years and ultimately never get paid.
As I understand things, weighing the pros and cons of judgment liens suggests that they be treated as just one of several tools creditors have at their disposal. Rather than relying exclusively on liens, it is better to employ as many strategies as possible to increase the chances of getting paid.
