When a transaction is on the way to closing, everyone in the deal is keeping fingers and toes crossed that there are no major snags. Occasionally the title search uncovers a judgment, which could then turn into one of those snags. Not all unpaid debts are judgments and not all judgments are liens. Let’s examine further.
What is a judgment? When a debtor (in the case of our hypothetical real estate transaction, one or more sellers on title) owes money to a creditor or claimant and there has been non-payment by the debtor, the matter can be taken before the Court. If evidence is presented to the satisfaction of the Court establishing money is owed and repayment terms have not been honored, the aggrieved party will be able to obtain a judgment visible in certain public records. Examples of common debts that turn into judgments impacting the sale of real property are past due HOA balances and unpaid credit cards.
What does a judgment do? It can appear on credit reports, lowering scores and harming a debtor’s ability to obtain future credit. More importantly, for the purposes of our hypothetical real estate transaction, in most cases a judgment will create a lien against real property owned by a debtor in the county or counties where the judgment has been put on record. This means that for the debtor to sell the real property the debt will have to be settled ahead of closing with the judgment removed from record, or the judgment will have to be paid in full at the time of closing from seller proceeds. It is common for judgments to go unpaid for years, accruing interest and collection fees along the way before a sale of real property enters the agenda of a debtor and creates a level of urgency to resolve the matter. While there are some more aggressive collection methods available to creditors, the strategy of obtaining a judgment and waiting for the sale of real property is a prevalent and passive one with the judgment operating as placeholder for the day (i.e., closing day) when a pool of debtor-controlled money will become available.
Can a judgment create liens in multiple locations? A creditor can take steps to put a judgment on record in multiple counties, not just the county where the judgment was originally sought and obtained.
Is it possible a judgment discovered in a title search might not create a lien against the real property in our closing? As one might imagine, a search for very common names such a Matthew Williams or Ashley Smith will turn up judgments entered against multiple different people all with the same name in the same county. If a seller signs and swears, while also providing indemnity, that the judgment(s) found on record was for a different person who happens to have the same name, it will not be a lien. If a judgment is too old and has not been renewed, there may not be a lien against the real property. If a judgment is against one spouse only and the real property is titled in the name of both husband and wife as tenants by the entirety, it will not be a lien in most cases.
Discovery of a judgment can be stressful scenario for sellers of real property. Sometimes sellers are unaware the debt was reduced to a judgment and other times sellers are simply unaware judgments can create a cloud on title, thereby forcing repayment to sell the real property. Depending on how expensive it will be to settle or payoff a judgment and how much money was going to be made in any given transaction, sellers may lose taste for completing a closing upon discovery of the judgment(s). It’s important to remember that discovery of defects in a seller’s title does not afford said seller a unilateral option to terminate the contract. Such a termination would constitute a seller breach of contract.
With this knowledge, now you can Rest Easy.