Can Collection Agency Put a Lien on Your House or Car?

A lien could cost you your home.

If you've ever had an experience with a collection agency, you know that their primary method of getting debtors to pay is to make incessant phone calls and send dunning letter after dunning letter through the mail. Debt collectors, however, are not limited to these annoying yet harmless debt recovery methods. Collection agencies also have the right to sue you in court and, if they win, put a lien on your house, car or other property.

Debt Collection Liens on Your House or Car

After winning a lawsuit against you, the court awards the debt collector a civil judgment. State laws vary, but collectors must generally file this judgment in the land records office in your county or with the Secretary of State's office. This creates a lien against your home. The lien prevents you from selling your house without

paying off the judgment. A bill collector's right to attach liens isn't limited to the house you live in. Collectors can also attach liens to vacant land, vacation homes and vehicles.

Read More: What Happens If a Collection Agency Sues You and Wins?

Foreclosure or Repossession By a Collection Agency 

A lien gives the debt collector the right to foreclose on your  home or respossess your car. The company then sells the asset and applies the proceeds to your debt. The good news here is that home foreclosures by collection agencies are a rare bird. Most people owe a mortgage on their home and the property may carry other liens as well. Because liens must be paid in the order they are filed, a collection agency doesn't stand a good chance of recovering its debt by foreclosing on your home. Foreclosure isn't cheap, and there is no guarantee that the collector could sell your home for enough money to make the foreclosure worthwhile. The same is true when it comes to repossessing your vehicle. In general, foreclosing on a house or repossessing a car is more trouble for a debt collector than its worth.

Read More: Can a Collection Agency Take My House?

If you own your home or car outright, however, and neither carries outstanding liens, you're in far more

Selling your home helps collectors recover your debt.

danger of the collection agency seizing the asset. That danger increases if the debt you owe is particularly high. As a rule, the higher your debt is, the more likely you are to face a collection lawsuit and possible foreclosure or repossession.

How Long Does a Collection Agency Lien Last? 

Collection agency judgment liens don't remain attached to your home or car forever. Each state has its own regulations regarding the length of time that a judgment is valid. Once its judgment expires, a collection agency's lien expires as well.

Read More: Statute of Limitations for a Collection Agency Judgment Lien

Unfortunately, waiting out a collection lien isn't a short process. Most states permit judgments liens to remain in effect for ten years. If the judgment isn't paid off within that ten-year period, the creditor can renew its judgment. Renewing the judgment, however, doesn't automatically renew the lien. If the lien isn't renewed, it expires and must be removed--even if the judgment itself was renewed and is still valid.

Odds are a collection agency won't remove an expired lien on its own. It's usually up to you to prove that the lien is no longer valid and that the land records office in your county must remove it. Once the lien is no longer attached to your house or car, you can sell them without being forced to apply the sale proceeds to your collection debt.

Does Foreclosure Hurt Your Credit If Your Name Is on the Title But Not the Mortgage?

If you and your spouse want to buy a home but you either don't have good credit or lack a steady income, your spouse can apply for the loan in his/her name only. Your name can then be added to the home's title after the fact. If your spouse has good credit, he/she can qualify for better rates without your name being on the loan. You, of course, still legally "own" half of the home since your name is on the title. Everybody wins--unless, of course, the home gets foreclosed.

How Much Does Foreclosure Hurt Your Credit?

Foreclosure is disastrous for your credit report and scores. Even worse, the better your credit is when the foreclosure occurs, the more it will hurt you. You could lose 150 to 250 points after the foreclosure shows up on your credit report. If your credit was particularly good when you lost the home--as is sometimes the case with "walk-aways" --you may lose as many as 300 points.

The good news here, at least for you, is that because your name isn't on the loan, the foreclosure itself will

not appear on your credit report. Your name on the home's title doesn't give the lender the legal right to report the incident to your credit report or even pursue you for payment. You didn't sign the original loan documents agreeing to pay the debt or agreeing to let the bank foreclose on the home if payments suddenly stopped coming. Your spouse's credit gets trashed but, in most cases, your credit comes away from the foreclosure without a scratch.

Post-Foreclosure Collection: Are You Liable If Your Name Wasn't on the Mortgage Loan?

If the bank can sell your home for more than your spouse owed on the mortgage loan, that's the end of the story. If the home carried an upside down mortgage or a floundering real estate market makes the home harder to sell, the bank may be forced to sell the property for less than your spouse owes in back payments, fees and foreclosure costs. Unfortunately, most states give lenders the right to pursue borrowers for any remaining deficiency after a foreclosure.

The real trouble arises if you live in a community property state. Community property states give lenders the ability to pursue either spouse for one spouse's debt. In other words, the very fact that you're married makes you liable for unpaid debts--even if those debts are in your spouse's name only. While this doesn't make the foreclosure suddenly appear on your credit report, your credit may suffer when the bank attempts to collect any mortgage deficiency left over after the foreclosure sale.

(Read More: Community Property States and Defaulted Spousal Debt)

Lets look at the following example:

Five years ago, Joe and Mary bought a home. At the time they bought the home, Joe had excellent credit and a good job. Mary had a very limited credit history and was a stay-at-home mom. Because she lacked stable credit and an income, Joe purchased the home in his own name and put Mary's name on the title. Two years later, Joe lost his job. He couldn't keep up with the payments and the bank foreclosed on the home. Joe and Mary owed $150,000 on the home, but the bank sold the property for only $100,000.

After the foreclosure, Mary found steady employment that paid well so she and Joe switched roles. He now stays home and Mary works. In an effort to collect the $50,000 deficiency, the bank decided to sue. Because Joe and Mary live in a community property state, the bank decides to sue Mary instead of Joe. Even though Joe's name was on the mortgage and Mary's was not, Joe no longer earns an income that the bank can garnish. Mary does. After winning the lawsuit, the bank garnishes Mary's wages.

If your lender sues you and wins, you'll end up with a civil judgment for the foreclosure debt on your credit report. Civil judgments are public records that, like foreclosures, are extremely detrimental to your credit score.

The moral of the story here is that yes, a foreclosure can hurt your credit if your name isn't on the mortgage loan--but not directly. It all depends on your state's laws, your lender's policies and whether or not you and your spouse end up owing a mortgage deficiency after the foreclosure takes place.

What Happens to a Second Mortgage During and After Foreclosure?

If you own a home and find yourself in a financial bind, taking out a second mortgage can alleviate your money woes. Granted, that home equity loan or HELOC (we're going to lump HELOCs into the "second

Do you really need that second mortgage?

mortgage" category for simplicity's sake) will cost you the equity you worked so hard to build, but most people end up selling their homes long before they pay off that 30-year mortgage anyway. While beneficial under the right circumstances, your second mortgage loan becomes a serious complication should your home fall into foreclosure.

Second Mortgages, Liens and the Foreclosure Process

When you take out a first mortgage, you must use your home as collateral. Your first mortgage lender attaches a lien to your property preventing you from selling the home without paying off your debt in full. The same is true for home equity loans or lines of credit. Because your home serves as the security interest for the debt, both lenders hold valid real estate liens and either lender can initiate foreclosure proceedings when you default on its loan.

During a foreclosure, loans are paid in order of priority. The first mortgage lender gets paid first because it filed its lien first. Any other lien holders are paid in the order their liens were filed – including the second mortgage lender. It often happens, however, that the home doesn't sell for enough money to pay off all of the liens the home carries – leaving some lien holders unpaid. To make matters even worse for junior lien holders, a first mortgage foreclosure wipes out all junior liens. Thus, your second mortgage lender could end up losing its security interest – your home – and getting no proceeds from the foreclosure sale.

Your Responsibility for Paying a Second Mortgage After Foreclosure 

After your first mortgage lender forecloses, your second mortgage lender's security interest – its real estate lien – no longer exists. Unfortunately for you, your contract with the second mortgage lender is still valid. You still owe that home equity loan or HELOC, and the lender isn't going to just forget about it and let you waltz away into the sunset debt-free. Not a chance.

All banks policies differ, and your second mortgage lender may allow you to continue making payments on your loan. This scenario is more likely if you continued paying your second mortgage when your first one fell into default and, eventually, into foreclosure. If you defaulted on your second mortgage along with the first, however, the lender may not give you the chance to pony up the dough voluntarily. It may just sue you.

Consequences of Second Mortgage Debt Lawsuit

Mortgage companies are not collection agencies. I advocate fighting collection agencies in court because they are sloppy, unorganized and often have no paperwork to back up outrageous financial claims. This is not the case with mortgage lenders. If a mortgage company sues you, you aren't likely to come out on top.

Stopped paying? Get ready for a lawsuit 

When the second mortgage lender wins its lawsuit, the court gives the company a civil judgment. Armed with a civil judgment, the lender can levy your bank accounts, garnish your wages, seize certain items of personal property and attach liens to other property you own, such a a car or second home. Even worse, the judgment itself is a public record. It appears on your credit report and can devastate your credit scores. Unlike most other negative credit report entries which only remain on your credit report for seven years, civil judgments stick around for the same amount of time that they are enforceable. Depending on the state you live in, a post-foreclosure civil judgment could stick around for a decade or more.

Statute of Limitations for Second Mortgage Lawsuit

Your lender knows that your finances are shot immediately after a foreclosure. Trying to collect from you at this point would likely be futile. You clearly don't have the assets to pay the debt because, if you did, you wouldn't have lost your home. Bank reserves are also at an all-time low immediately after foreclosure.

Does this stop the second mortgage lender from suing you? Absolutely not. It just stops the lender from suing you immediately  The lender wants to collect your defaulted loan balance, and the best way to do that is to hang back and give you the opportunity to get back on your feet financially before snatching the rug out from under you.

How thoughtful.

Every state, however, has a statute of limitations after which you have an airtight defense against your mortgage lender in court. Should the lender sue after the statute of limitations expires, it cannot obtain a judgment against you if you use the expired SOL as a defense in court. At this point, it doesn't matter if you owe the debt or not. All that matters is that the debt is too old and the creditor cannot take legal action past this point.

I'd like to think the lesson in our little cautionary tale is simply this: Avoid second mortgages. Just say no to HELOCs and home equity loans. Run, run, run from using your home to acquire even more debt for things you property don't need in the first place lest your efforts end with a foreclosure.

Related Articles:

Collection Lawsuit Statute of Limitations By State

Make Yourself Judgment Proof

Funds Exempt From Bank Account Garnishment