By Eric Olsen Executive Director HELPS Nonprofit Law Firm
A senior couple recently contacted me. They were served with legal papers for around $5000 for an old credit card they owed. They had never been sued before. They had heard that a judgment would become a “lien” on their home and worried about what that meant. Their income was $2500 per month from social security and a VA pension. The husband was disabled and everything was necessary for their basic living expenses, including a mortgage, food, and medicine. There was nothing left to pay the $25,000 in different credit cards, let alone the lawsuit for $5000.
I explained that social security, pensions, disability income and VA benefits are completely protected by federal law, it couldn’t be taken from them, even if someone obtains a judgment. They were not alone in never having realized that their retirement income was protected.
“But what about a lien on our home?”, they asked. The home was worth about $80,000 more than the amount they owed. That $80,000 was their “equity” in their home. I explained that each state has “homestead exemption” laws that protect a certain amount of equity in a home. The homestead exemption where they lived was $50,000 for a married couple.
In most states, a judgment automatically becomes what is called a “judgment lien” on real property, which includes a home on land a person owns or is buying. I explained why a judgment lien is almost never a cause for concern. A judgment lien is not like a mortgage loan where a payment is required each month. For many seniors who have little or no equity in their home, a judgment lien is essentially meaningless. It’s a lien on nothing.
What about where there is equity in a home over the homestead exemption? Theoretically, it is possible for a judgment creditor to foreclose a judgment lien where there is sufficient home equity. It is a complicated and expensive process. It is highly unlikely and almost never occurs with a credit card, medical debt or almost any other consumer judgment debt creditor. Even in instances where a home is owned free and clear. I explained that in nearly forty years of my law practice dealing with exactly these matters, I had seen that attempted on maybe one or two occasions. Judgment creditors let a judgment sit there hoping they get paid at some point in the future perhaps at closing when the home is sold. And if something did happen there are other solutions to stop a judgment lien foreclosure.
“What about bankruptcy?”, they asked. I explained because they had around $30,000 in equity over the amount of their state’s homestead exemption it could be placed for sale by a chapter 7 bankruptcy trustee. When sold they would receive their homestead exemption first, then the creditors would get paid. They wanted to keep their home so that wasn’t an option. In some circumstances another form of bankruptcy, chapter 13, allows a person to keep a home that has equity over the homestead exemption. However, because they had so much equity, they would likely need to pay a chapter 13 trustee around $500 per month to pay all their old debt over a period of three to five years. They had no extra money for a chapter 13 payment.
“What if we do nothing?”, they asked. I explained again that the judgment lien would simply sit there. Their income was protected and couldn’t be garnished so they didn’t need to make payments on the judgment. That was the answer.
There are always options for homeowners. Depending on the circumstances some options make more sense than others. Perhaps selling a home and downsizing, or if there is enough equity, obtaining a reverse mortgage, or in some instances a form of bankruptcy. For many seniors receiving protected retirement, the option could be simply doing nothing. Then deal with the judgment lien later, perhaps when the home was sold.
This couple was relieved to learn they didn’t have to worry about the other credit card debt they couldn’t afford. That there was an organization like HELPS, a nationwide nonprofit law firm that protects seniors from unwanted collector contact. Someone they could always call and talk to if they were worried or concerned. Visit our website at www.helpsishere.org or call HELPS toll free at 855 HELPS US to learn more. HELPS never turns a qualified senior away that needs our help.