Under what circumstances can a debt lien on real property be satisfied by foreclosure?

For example, let's imagine a debtor fails to pay a debt, say a car loan on a vehicle that is now missing or destroyed and $25,000 remains on the note. The lender takes the debtor to court and gets a judgement. Then, judgement in hand, the lender places a lien on the debtor's $300,000 house which the debtor has mortgaged and on which the debtor still owes $140,000.

Is there any way for the auto loan owner to force the property into foreclosure so he can collect his $25,000 or will the lien just sit there?

  • 1
    It depends if you used your property as collateral for the loan. If you have, and you default, they can foreclose their interest by getting a judgment and forcing a sale to satisfy their lien. This is uncommon with a car (to use real property as collateral to the note) because they would be the second lien holder (the mortgage holder being first), so any sale would satisfy the mortgage first. But yeah, if you have no or only a small mortgage and enough equity, and you put it as collateral, they can foreclose the interest.
    – gracey209
    Sep 22 '15 at 12:57

The answer depends on state law, which differs from state to state. What the auto lender has is generally known as a judgment lien. A judgment lien arises when a creditor goes to court and gets a judgment against the debtor. The creditor (generally depending on the state statute) then records this judgment in the property records as a lien. The creditor (most likely through a judicial proceeding) could go back to court and foreclose on the property. Note, that the mortgage would be paid first from the proceeds of the foreclose sale (since it is first in line) and then the judgment creditor's lien would be paid off. Any leftovers would get distributed to the homeowner.

However, the judgment creditor may not foreclose, rather the judgment creditor could just allow the lien to sit there and (depending on state law) collect interest (which depending on the state post-judgment interest can be steep). In that case, you would be unable to sell the home or refinance until the judgment lien is paid off.

Note, must states have something called a homestead exemption in which a fixed amount of value in the real property of a debtor that is the debtor's primary residence is untouchable.

  • Can you clarify the "homestead exemption?" It's unclear what you're saying about it: The homestead can be foreclosed, but some amount of the proceeds has to be given to the debtor? AFAIK that's not right.
    – feetwet
    Sep 23 '15 at 3:08
  • @feetwet. Really depends on the state. For example see Colorado Statute 38-41-201 which provides that a homestead is exempt from execution and attachment not exceeding in cash value in excess of any liens and encumbrances the applicable homestead exemption ($75,000/$105,000). And Colorado Statue 38-401-206(1) requiring a creditor submit a certificate complying with the homestead exemption before the sheriff will proceed with the foreclosure. Also, subsection 4(b) providing that if the sale is successful the homestead claimant is paid after all prior liens but before the judgment is satisfied.
    – JjTwinks
    Sep 24 '15 at 5:53
  • @feetwet: The effect of a "homestead exemption" depends on jurisdiction, and on the value of the property. Sometimes the creditor cannot force foreclosure / sale of the debtor's primary residence - so no foreclosure at all; sometimes they can force foreclosure, but the debtor gets some minimum sum from the sale, even if the rest is not enough to satisfy all debts.
    – sleske
    Sep 12 '16 at 7:26

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