Judgment Liens and Home Equity Erosion: The Silent Cost of Ignored Lawsuits

Judgment liens represent a silent but devastating form of home equity erosion that begins with an ignored legal summons. When a homeowner fails to respond to a creditor’s lawsuit, the resulting default judgment transforms an unsecured debt into a secured debt, attaching to the homeowner’s property.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: The Silence of a Judgment Lien

• Silence is Expensive: Ignoring a summons does not halt the legal process; it results in a default judgment, which provides the creditor with a powerful legal mechanism to transition from unsecured to secured status.
• The “Silent Partner” Is Taking Your Equity: Once a judgment is recorded, it attaches to real property as a judicial lien. From that moment forward, the creditor essentially owns a growing percentage of your home’s equity.
• The High Cost of Statutory Interest Accruing: Unlike fixed-rate mortgages, judgment interest rates are set by state law and often exceed market rates. Resulting in the debt doubling, creating a “snowball effect” of debt.
• Liens Do Not Disappear: Judgment liens aren’t going anywhere more than a mortgage will. At the time of a sale or refinance, that lien must be satisfied.
• Probate Court: In probate, these liens “run with the land.” This means heirs and beneficiaries will receive less than anticipated because the lien(s) have to be satisfied, with substantial interest accruing during this time.

The Cost of Silence: How Ignored Lawsuits Liquidate Future Equity

When it comes to consumer debt, a pervasive myth exists that ignoring debt is acceptable because creditors have no legal recourse. For many homeowners, getting served by a process server or the local Sheriff’s Office results in throwing the lawsuit away (the circular file). However, as I’ve mentioned in several articles, there are two phases to a lawsuit. The first phase is the lawsuit, and the second phase is collecting upon a judgment.

Ignoring a lawsuit is never a good idea, unless bankruptcy is imminent. Otherwise, when it comes to collecting on the judgment, you face multiple risks, such as a wage garnishment, freezing of bank accounts, or slowly losing the equity in your home because of a lien. To learn more about defenses to a lawsuit, read this prior article. To learn how bankruptcy stops lawsuits with the automatic stay, click here.

The Metamorphosis of Debt. From Unsecured Debt to Secured Debt

When a response is not filed to a lawsuit, the case proceeds with the court entering a default judgment. When a motion for default is filed by the creditor, the court assumes the claims made in the petition or underlying complaint.

For example, suppose you owe $1,000, but an error by the creditor listed the debt at $10,000. Since there wasn’t a response, the court will assume the $10,000 debt total is correct. For this reason, even if you are served, and the debt is not even yours, you shouldn’t ignore the lawsuit in case there is mistaken identity. That could result in a snowball effect of collecting on the judgment.

I was once served with a lawsuit. Because I have a common name in Miami, that happens. I made sure to contact the lawyer and file a stipulation that I was not the person they were looking to serve.

Once the judgment is issued and the collection phase of the case begins, the creditor can take action to protect their interests by placing a lien on your property. So the unsecured debt, such as a credit card, medical bill, or personal loan, becomes secured (attached to your home).

The Silence Speaks Volumes. Time is Money.

How does $1,000 become $2,000? When a judgment lien is ignored. While the judgment is for “x” amount, the principal balance, the creditor or lienholder is entitled to statutory interest.

While mortgage rates may fluctuate with the market, post-judgment interest rates are set by state statute, and often, those rates are significantly higher. The lien continues to accrue interest.

 So imagine ignoring a lawsuit or judgment for $15,000. That amount can easily double, but don’t forget that the judgment also will include attorney’s fees and costs, which could add several thousand dollars to the overall debt total. Meanwhile, the lien is silently “eating” away the equity that the homeowner believes they are building through their mortgage payments and market appreciation.

The Day of Financial Reckoning: Sales, Refinancing, and Probate

The financial impact of these liens remains invisible until a “trigger event.” It is at this time that the homeowner may experience “sticker shock.”  A homeowner can face multiple scenarios where those liens will now have to be paid off.

The Sale: As I witnessed in my own home purchase, the seller ignored multiple lawsuits. He even had liens from Miami-Dade County. One lien was for a water bill, the other for not renewing his dog’s rabies tag.

At the time of closing, the title company must satisfy these liens from the proceeds before the seller receives a dime. In many cases, the seller walks away with only a fraction of their expected “nest egg.”

While the title agency was able to negotiate and reduce the amount owed on the liens, the seller took a financial hit. You can learn more about using bankruptcy to sell your home via this link.

The Refinance: Homeowners seeking to take advantage of lower rates or pull cash out for repairs or remodeling are often blocked. Mortgage lenders will require that the judgment be satisfied, forcing the borrower to use their equity to pay off the lien. This also costs the homeowner more since they are adding the judgment to their new balance, whether with a complete refinance or trying to obtain a second mortgage, which could be more difficult now because there’s less equity in the property.

The Probate Trap: Perhaps the most tragic financial consequence occurs at death. Beneficiaries often view a family home as a debt-free legacy. An opportunity to create generational wealth. However, because the lien “runs with the land,” the executor must pay the judgment creditors plus years of accrued interest before distributing the rest to the heirs.

Now imagine how much that will cost the beneficiary if a lien has been sitting quietly for decades?

They Can’t Take My House

I wish to stress the general confusion of liens and homestead property. One of the main reasons liens are ignored is that homeowners state, “they can’t take my house.” That is true. A foreclosure action is highly unlikely, as most states have strict statutes against that. However, as I already mentioned, while they won’t take your home, they will take your equity! So debtors are not judgment-proof because their home won’t be foreclosed on.

The Professor’s Conclusion: The High Price of Avoidance

The “Ostrich Effect,” burying one’s head in the hope that a creditor will go away, is a strategy with a 100% failure rate once real estate is involved. Although, as mentioned, creditors do have other means to collect, such as wage garnishment or freezing bank accounts.

The legal system provides creditors with the power to attach judgments to homestead property. For the consumer, the lesson is clear: a lawsuit ignored today is a home’s equity stolen tomorrow.

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