1. What Is a Judgment vs. a Lien and how do they arise in Real Estate?
When you owe money and are unable to pay, the creditor, unless it is the IRS, must take you to court before levying upon your back accounts or garnishing your wages. Typically the creditor will sue you in municipal court or in common pleas court in Pennsylvania if the amount of the claim is larger than $12,000 (up to 15,000 for Philadelphia County real estate matters). When a lawsuit is initiated against you, you will be served with a Complaint. If you do not respond (by answer or other responsive pleading) within a set period of time or appear at the hearing set for your case, a default judgment will be issued against you. This judgment will be recorded by the court.
In Pennsylvania, a judgment is an automatic lien on real property owned by the defendant in the county in which the judgment is located. The lien of a judgment lasts for 5 years, 42 Pa. C.S.A. Sec. 5526, and execution must be issued against personal property within 20 years after entry of the judgment, 42 Pa. C.S.A. Sec. 5529. In addition, via a mechanism called a writ of execution liens can be transferred to other counties in Pennsylvania where the debtor owns property. A lien on real property means that the debtor cannot sell the property until all liens are paid. However, a judgment lien can only be arise in real property. If the debtor does not own real property within the applicable jurisdictional limits, the judgment lien cannot attach to anything and all the creditor has is a recorded judgment. What is the use of this? Well, the creditor can then use this judgment to pursue garnishment where available or levy upon your Pennsylvania bank accounts. However, wage garnishment is prohibited in Pennsylvania except for certain obligations such as support. It is critical for homeowners to respond to all lawsuits by bringing them immediately to the attention of their attorney as in this way an ordinary unsecured debt such as a unpaid credit card debt can become a lien against your home. (See final comment below.)
The filing of a bankruptcy will stay a foreclosure and the underlying debt can be discharged in a bankruptcy except for certain obligations such as domestic support obligations (DSO’s) which are non-dischargeable under Section 11 USC. 523(a) (5) of the Bankruptcy Code. (But see my blog on the effects of a Chapter 13 bankruptcy on DSO’s for further valuable information for homeowners facing support issues.) Even if these steps are taken the lien of the prior judgment will typically continue (in some some cases they can however be completely or partially removed as discussed below) and may cause difficulties for homeowners. To avoid the continuing negative financial consequences they can create, the judgment will need to be removed where possible.
2. REASONS TO HAVE A LIEN/JUDGMENT REMOVED:
When a creditor who has obtained a judgment but the debtor subsequently files a bankruptcy, the debt underlying the judgment is discharged through the bankruptcy. However, the lien of the judgment itself will remain and will be effective against any real property in the county and will interfere with the sale of the property. A lien on real property means that the debtor cannot sell the property until all liens are paid. Understandably, a title company will refuse to clear the title for a home when the property has a judgment lien against it until the title insurer receives proof that the lien has been satisfied or discharged and this can defeat or delay a sale of the property. A lien can of course be satisfied through payment but a typical homeowner files bankruptcy precisely because they can no longer pay their mortgage.
Even if you do not own real estate, while no creditor can collect upon the judgment, it will still continue to exist on the county record. The judgment will be reported to credit bureaus as active, thus continuing to impair your credit for up to 7 years, which is the length of time a judgment can remain on your credit.
3. WHICH JUDGEMENTS AND LIENS IN REAL ESTATE MAY/MAY NOT BE DISCHARGED BY BANKRUPTCY AND HOW IS THIS DONE?
Certain types of debt cannot be discharged through a bankruptcy. For example, back child support cannot be discharged through a bankruptcy.
The lien of a judgment which was entered before the bankruptcy was filed will appertain against real property of the debtor for at least 5 years after entry of the judgment in the county. (See above). However, to the extent the lien impairs an exemption the lien will be subject to removal once the debt has been discharged.
The homestead exemption in bankruptcy applies to property used as your residence. As of early 2012, the federal homestead exemption is $21,625 (if both spouses file, this is doubled). State homestead exemptions vary a great deal. In some states, like Florida, there’s no limit, while in other states, like New York, the limit is $50,000 to $150,000, depending on where in the Empire State you reside. In Pennsylvania, for example, the federal exemption may be elected. So, if you have a house with $50,000 worth of equity you are entitled to a federal exemption with your spouse of $43,250.00. If you only owe $50,000 on the property, you can petition the court and have the judicial lien removed up to the exemption amount. The lien for the remaining $6,750 will remain on the books. Unfortunately however, few homeowners in this day and age of declining home values have sufficient equity in their homes to claim equity impairment sufficient to remove liens following bankruptcy. (See final comment below.)
This process only works when you have claimed a valid exemption relating to your principal residence in the bankruptcy proceeding and the underlying debt has been discharged. If these conditions are met, the bankruptcy court will, upon motion made by your attorney, remove the lien to the extent it impairs your homestead exemption.
A debt must have however been included in the bankruptcy for it to have been discharged. If the creditor was not listed and the debt existed before the case was filed, the case may need to be reopened and the creditor added. (This topic will be treated in greater detail in my blog under construction with the working title: “U is for the Unlisted Creditor in the Bankruptcy Alphabet”.)
If you are involved in a Chapter 13 bankruptcy, which is the usual case for homeowners, you cannot receive a discharge until your plan has been completed which can take up to 60 months. A judgment cannot be removed if a discharge has not been issued. You will have to wait until your plan is completed before you will be able to remove any judgments issued against you and begin to clear your credit.
Once the discharge has been obtained, clearing a listed judgment (but not the judicial lien if you have non-exempt real estate in the county: see above) may be as simple as having your lawyer send a notice of discharge in bankruptcy to the clerk of the court of the county in which the judgment was recorded with a copy to the creditor.
Clearing debt off your credit report however can require the additional help of a credit specialist. Certain lawyers can assist you with credit repair.
4. CONCLUSION: DO NOT HIDE YOUR HEAD IN THE SAND:
Obviously these rules are very complicated and, while I have illustrated with examples drawn mainly from Pennsylvania where I practice, vary from state to state and even within state boundaries. There is however one sure fire way to keep a lien from arising on your real property in Pennsylvania and elsewhere. Never allow a judgment to be entered against you before you have the oportunity to file bankruptcy. Instead, seek the advice of a competent bankruptcy lawyer as soon as you see the first sign of a law suit looming on your horizon and start planning for a bankruptcy filing to preempt the filing of a judgment.
Law Offices of Christopher C. Carr, MBA, P.C., is a quality bankruptcy and debt relief practice, located in Valley Township, west of Coatesville, Pennsylvania, where Attorney Christopher Carr, a Chester County bankruptcy attorney, who has over 30 years if diversified ;egal experience, concentrates on serving the residents of and businesses located within Western Chester County and Eastern Lancaster County, Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Sadsbury, Thorndale, Valley Township, Wagontown & West Chester, Pennsylvania. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at firstname.lastname@example.org today!
I also provide Mortgage Modification Services.
©Christopher C. Carr, Attorney at Law, 2012, All Rights Reserved. See Disclaimers.
Other bankruptcy attorneys discussing the Letter “J” include:
- Joint Filing Marin County Bankruptcy Attorney, Catherine Eranthe http://marin-bankruptcy-law.com/2011/11/27/bankruptcy-a-to-z-j-is-for-joint-filing/
- Judgment Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell http://bankruptcyblog.caldwell-lawfirm.com/2011/11/09/bankruptcy-alphabet-j-is-for-judgment.aspx
- Your Personal Finance Lawyer New York Bankruptcy Lawyer, Jay S. Fleischman http://www.consumerhelpcentral.com/jay-fleischman-personal-finance-lawyer/
- Justify Northern California Bankruptcy Lawyer, Cathy Moran http://moranlaw.net/blog/bankruptcy-alphabet-j-for-justify/
- Judgment Liens Colorado Springs Bankruptcy Attorney Bob Doig http://springsbankruptcylaw.com/?p=1165
- Joint Debts Hawaii Bankruptcy Attorney, Stuart T. Ing http://www.bankruptcyhi.com/2011/12/j-is-for-joint-debts/
- Judicial Lien Cleveland Area Bankruptcy Lawyer, Bill Balena http://ohiobankruptcysource.com/?p=2325