Tuesday, September 13, 2011

Statute of Limitations for a Collection Agency Judgment Lien

We've already talked about the statute of limitations for debt collection lawsuits, but there is another statute of limitations that I don't think I've mentioned yet – the statute of limitations for collection agency judgment liens.

How a Judgment Lien Works

After a collection agency successfully sues you, it receives a court judgment. The court judgment gives a collector rights it did not previously enjoy. One of those such rights is the right to place a lien against your home. Such as lien is often referred to as a "judgment lien" because it is the direct result of a creditor's court judgment against you.

Judgment liens give creditors a security interest in your home
Once the collection agency attaches its judgment lien to your property, it owns a security interest in the property equal to the amount of the judgment. A judgment lien against your real estate (and, in some cases, against your car) secures the collector's previously unsecured debt.

How a Judgment Lien Can Hurt You

While any secured creditor has the right to seize the collateral securing its debt if the debtor does not pay, most collection agencies aren't going to place a lien on your home and immediately move to foreclose. This is because most homes today have mortgages against them. Because the mortgage lender filed its lien first, the mortgage lien has "priority" over the judgment lien. This would force the collection agency to pay off your mortgage if it wanted to foreclose on your house – not something most debt collectors are willing to do.

A judgment lien hurts you not because it gives the collection agency a claim against your property, but because it limits your ability to sell your property to another individual.

Selling a House That Carries a Collection Agency Lien

If you wanted to get strictly technical, you can legally sell your house to anyone you please, no matter how many liens it carries. The liens, however, stay with the property. If your buyer plans to finance his purchase using a mortgage lender, the mortgage lender will conduct a title search, find the judgment lien, and immediately balk.

You'd be hard-pressed to find a mortgage lender willing to loan a buyer the money to purchase your home until the collection agency releases its judgment lien. Remember how I mentioned that the collection agency would have to pay off your mortgage to foreclose on your home because your mortgage is a superior lien? In this case, the judgment lien would be the superior lien. If the mortgage lender ever needed to foreclose on the property, it couldn't do so without first paying off the collection agency's lien.

Selling your home? Think again
But here's where things really come to a head: As soon the collection agency realizes it holds the superior lien on a property, it can foreclose and seize the home no matter who owns it or who the other lien holders are (I'm not including tax liens here. Tax liens are a whole 'nother can o' worms that I do NOT want to open today.). Foreclose wipes out junior liens. Thus, if the buyer's mortgage was for $100,000 and the collection agency's judgment lien was for $5000, the mortgage lender would lose $100,000 over a $5000 debt (In this case it would sue the homeowner, but to a mortgage lender it just isn't worth the risk).

The potential for a big financial mess is enough incentive to prevent mortgage companies from financing home purchases if the home in question carries a lien.

Judgment Lien Statute of Limitations

The statute of limitations for judgment liens is dictated by the length of time a creditor can enforce a judgment in the debtor's state of residence. Let's use California for an example. In California, judgments are valid for ten years. After the statute of limitations passes, the collection agency can still collect on the judgment, but only if the debtor pays the debt voluntarily. The collection agency must also release its property lien.

Now, lets talk about renewal. Most states give judgment holders the right to renew their judgments if the judgment is close to expiring and creditor has not yet collected the judgment. We're still in California, guys. The collection agency has decided, after nine years, to renew its judgment....but the lien still expires on the date the original judgment was scheduled to expire (bear with me, I'm trying to make this as simple as I can).

The collection agency renewed its judgment, but it couldn't renew its lien. The renewed judgment gives the debt collector the right to file a brand new property lien, but it loses the priority of its previous lien. Thus, any liens filed after the collection agency's original judgment lien were once junior liens but, because the priority order did not change for those liens, they are superior to the creditor's claim when it files its second lien after renewing the judgment.

Judgment Statute of Limitations and Lien Laws Vary By State

I was using California law as an example, but the same policies apply in many states. Others do not allow creditors to re-file liens upon renewing a judgment. If you know the statute of limitations for enforcing a judgment has already expired in your state and a collection agency holds a judgment lien against your home, you can demand that the company immediately release its lien and send you written notification that it has done so.

If you're curious about the statute of limitations for judgments in your state, check out this chart from Bills.com: Collection Laws & Exemptions It lists the statute of limitations for both lawsuits and judgments in all fifty states.

Related Posts:

Can a Collection Agency Take My House?

The Lawsuit Statute of Limitations


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  4. Unless the collector is using sewer service you should have notice a collector wants to go to court. In Illinois which has exemptions, the bank account would be declared before the judgement goes into effect.
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