What Do You Mean I Can’t Sell My House?

Recently, a client contacted us about a piece of real estate he would like to sell. He has a qualified buyer, the ability to pay the balance of the mortgage, and is overall prepared and eager to get rid of the property. But a troublesome document is standing in his way: a judgment lien. Our client, “Mr. A,” owns the property with “Mr. B.” Mr. B found himself on the losing side of a multi-million dollar lawsuit. Mr. B’s “judgment creditor” (the opposing party from the litigation who is owed that large money judgment) filed a “judgment lien” against Mr. B’s interest in the property, which shows up in the chain of title. It is similar to a mortgage or other lien; its purpose is to ensure that any equity in the property goes to pay the judgment instead of ending up in the pocket of the seller/judgment debtor. If it’s not paid, the lien stays on the property. Does this mean Mr. A cannot sell the property without coming up with several million dollars?

In Mr. A’s case, the property is under water as a result of the first mortgage alone, and Mr. A is coming to the table with thousands of dollars in order to satisfy that mortgage. Not one cent will be available to go towards the judgment. Additionally, Mr. B does not have the money to satisfy the judgment in full. Mr. A is technically still able to sell the property despite the judgment lien. There is nothing the judgment creditor can legally do to stop the sale. The judgment creditor cannot foreclose on the judgment lien or take any other action to prevent the sale (assuming it is a valid, arm’s length, fair market value sale). Despite the fact that the judgment creditor’s hands are tied, title companies generally will not insure the title for the buyer while the judgment lien remains a “cloud” in the chain of title. To add insult to injury, the judgment creditor is not in any way obligated to discharge or remove the lien if it is not receiving any money from the sale. As a result, the judgment lien could stay in the chain of title for up to 10 years.

So, to recap: 1) the property can be sold; 2) the judgment creditor cannot interfere with the sale or foreclose on its lien; 3) the judgment creditor is not obligated to remove the lien if the property is sold to a third party; and 4) the title company will likely refuse to insure the title to the property with the judgment lien in place.

And that’s the problem: the buyer is not likely to want a property with these issues in its chain of title. So what are Mr. A’s options?

  • Find a new buyer who is more of a risk-taker or one who understands this glitch in the law.
  • Hold onto the property until the judgment lien expires (10 years from the date it was recorded).
  • Search for a title company and underwriter willing to insure over the lien.
  • Try to get the judgment creditor to discharge the lien voluntarily with regard to this particular property by showing the lack of equity in the property, which is most likely the best option.

Unfortunately, the conundrum caused by the judgment lien law does not seem likely to change anytime soon, so property owners and title companies are left to manage these situations as best they can, likely on a case-by-case basis.

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