A friend of mine bought a house two years ago in Va. She has over $120,000 in credit card debt, which she quit paying one year ago. She is using her house to run a daycare business and is barely making enough income to survive on. She is worried about having her house seized. What should she do?
Although it is unlikely that a creditor for unsecured debt will seize real property such as a home, it is legally possible for a creditor to do so.
Here are the basic steps that a creditor would need to take to seize a property.
To start, a creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a "summons to appear" or a "summons and complaint." In some jurisdictions, a process server will present the summons personally. In others the sheriff's deputy will pay a visit with the summons, and in others the notice will appear in the mail. Each jurisdiction has different civil procedure rules regarding proper service of notice. (See Served Summons and Complaint to learn more about this process.)
In the hearing, the judge will decide if the creditor should be allowed to collect the debt. If the debtor fails to appear, the judge has no choice but to decide on behalf of the creditor.
A judgment is a declaration by a court that the creditor has the legal right to demand a wage garnishment, a levy on the debtor's bank accounts, and a lien on the debtor's property.
A lien is an encumbrance -- a claim -- on a property. For example, if the debtor owns a home, a creditor with a judgment has the right to place a lien on the home, meaning that if the debtor sells or refinance the home, the debtor will be required to pay the judgment out of the proceeds of the sale or refinance. If the amount of the judgment is more than the amount of equity in your home, then the lien may prevent the debtor from selling or refinancing until the debtor can pay off the judgment.
Alternatively, the lienholder has the right to foreclose on the property. However, in many situations foreclosure would be foolhardy because the lienholder would stand in line behind senior encumbrances, such as a first and second mortgages or first and second deeds of trust. These senior obligations would be paid first before the lien. Therefore, from an economics perspective, it makes little sense for a lienholder to foreclose on a property when they could play the waiting game and be paid when the property is sold or refinanced.
From a business perspective, it makes little sense to foreclose because of the public relations disaster that would result. Local news media would love to excoriate a credit card company for tossing a local family onto the street for failure to pay a relatively small credit card balance.
Regardless of the chances of foreclosure on a residence for credit card debt, every state has its own rules about property liens, so debtors with a judgment against them who own property should review their state's laws to learn creditor can and cannot do to enforce its judgment. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state's rules.
If you have a judgment against you, consult with an attorney licensed in your jurisdiction to learn how the judgment will affect you, based on your individual financial circumstances and your local rules.
I would encourage your friend to consult with a firm that negotiates reductions in unsecured debt. For a no-cost, quote from pre-screened service providers, go to the Bills.com debt relief savings center.
If the debt relief program is not one that will work for your friend, I encourage her to speak with an attorney in her state who has experience in bankruptcy to discuss her options.
I hope this information helps you Find, Save, and Learn.