Tuesday, August 3, 2010

Can a Collection Agency Take My House?

Can a Collection Agency Take My House? 

Unfortunately, in some cases, yes.

Keep in mind that this rarely, if ever, takes place and whether or not it will actually occur depends upon how much you owe the collection agency and how much equity you hold in your home. Typically, the greater the amount you owe, the harder a collection agency is willing to work to recover it. Thus, don't expect a collection agency to go after your house for an unpaid library fee. It's not going to happen.

How A Creditor Can Take Your House

If a debt recovery agency sues you, you have several options:

1. Respond, show up in court and fight.
2. Try to work out a payment arrangement outside of court
3. Ignore it. 

Ignoring a summons from a debt collector is a huge mistake. This results in the company getting a default judgment. Default judgments will not only appear on your credit report, they give the collection agency a plethora of additional collection rights it did not previously enjoy – including placing a lien against your personal property.

Your house can be seized and sold to recover an old debt.

Let's examine how a lien works. 

Judgment Liens From Debt Collectors 

The lien you are probably most familiar with is the lien your mortgage company has against your home. The lien is simply a registered legal right to take possession of your property should you stop paying the debt you owe to the mortgage company. As long as you pay your home loan on time, you can live in the house without worry that your mortgage company will snatch it out from under you through a foreclosure. 

Other liens, however, aren't quite so benevolent. A judgment lien is any lien a third party seeks against your property for a debt. While the lien holder doesn't  hold the same rights as your mortgage lender, that doesn't mean it can't also force you into foreclosure. 

Lien Priority Order, Judgment Liens and Home Foreclosure 

Once a collection agency records a lien against your home after a judgment (and they cannot do this in every state) they become a real estate lien holder with the right to foreclose. Just because they have the legal right to foreclose on your home, however, doesn't mean they will. Foreclosure is pricey and collection agencies are cheap. Always remember that. 

Should a judgment creditor choose to foreclose on your home, they must adhere to the lien priority of the judgment lien they hold against your property. For example, if you carry a mortgage, your mortgage lender takes first priority. Regardless of who forecloses, the mortgage company must be paid before any other debts. Should another lien holder file its claim first, it holds priority. 

Now, just having a judgment lien approved by the court isn't enough. The collection agency must actually record that lien with the land records office in your county to establish its lien priority. If it fails to do this, or does this too late, other lien holders may establish superior liens (i.e. liens with greater priority) even if they obtained their judgments after the original judgment was levied. Take a look at this example:

Example 1

Joe owes ABC Collections $25,000. He also owns his own home. Joe's home is worth $150,000, and he only owes his mortgage company another $100,000 before paying off the home. Thus, Joe currently has $50,000 in equity – twice what he owes ABC Collections.

ABC Collections sues Joe and Joe ignores the lawsuits. It then obtains a judgment lien for the $25,000 Joe owes. It records the lien, establishing priority. The only other lien on Joe's home is his mortgage lien. ABC Collections initiates foreclosure and seizes Joe's home. It then sells the property and gives the mortgage lender the $100,000 Joe owes, keeping the remainder of the profits. 

That doesn't sound pleasant, does it? In this scenario, the debtor owes a debt large enough to push the collection agency to take action against him. Because he never even tried to fight the debt, he lost his home because of it. What if ABC Collections couldn't prove that Joe owed the debt? What if Joe lost his house for absolutely nothing??? It happens all the time. 

Don't let a collection agency take your house.

Lets look at two more common scenarios. In these examples, Joe still owes ABC Collections the same amount, but his financial situation is a little bit different. 

Example 2

Two years ago Joe bought his house for $150,000, which was fair market value at the time. Unfortunately, real estate values in his area have plummeted and Joe's house is only worth $99,000 now. ABC Collections obtains a judgment against Joe for $25,000 but, after reviewing the property value, it never bothers to record a lien against the property. Since the mortgage company is the primary lien holder and won't recover what its owed through a foreclosure, ABC Collections has little hope of ever doing so. 

You see how this works? So much of whether or not the collection agency will use a real estate lien as a collection tool rides directly upon the value of the home and how much you owe your mortgage company. Other lien holders, however, may also play a role. Let's look at another example. 

Example 3

Joe's house is worth $150,000. He owes $100,000 – giving him $50,000 in seizable equity. Joe, however, owes the IRS $40,000 in back taxes for a business venture that failed five years ago. His home also carries a mechanic's lien in the amount of $7,000. These liens were recorded before ABC Collections obtained its judgment. Thus, ABC Collections has the right to foreclose on Joe's house, but it only stands to recover a mere $3000. Given the cost of foreclosing is greater than $3000, the collection agency would actually lose money if it tried to foreclose on Joe's home. 

Are you starting to see how the judgment lien process works now?  Sure, a collection agency can take your house? But does it want to? A collection agency will only take your house if it financially benefits the company to do so, and in most situations, it doesn't. 


  1. I thought there was an exemption of 35,000 on a home and 70 ,000 if your married. So say you owe 25,000 to a credit card company and you have 50,000 in equity and your married. Isn't it impossible for the credit card company to collect? I know they can lien your house but, would they be able to foreclose? I live in North Carolina and read that some where tho I could be wrong.


  2. We do have an overwhelming desire to the home this loan will be linked to and I wasn't sure whether or not to include emotional pull in the letter.

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