If you fail to pay your mortgage on time, you may wind up with your house in foreclosure. When it comes to other debts, such as business or personal loans and credit cards, your creditors might seek a judgment against you that could put your home at risk. What happens will depend on your personal situation and where you live.
When Can a Creditor Put a Lien on Your Home?
If you used your home as collateral to secure a debt, such as a personal or business loan or line of credit, and then you default, the lender may be able to foreclose on your house to collect the balance you owe. In general, if you’re behind on payments to a commercial creditor, the creditor must sue you and win a judgment against you before it can seize your property to cover the debt. If it wins a judgment against you, it can have a lien placed on your home giving it the right to foreclose on your house to collect the money owed.
Some types of entities can file a lien against your property to collect a debt. For example, a federal, state or local government can put a lien on your home to collect back taxes.
Will a Creditor Choose to Foreclose?
In most states, a certain dollar amount of home equity is exempt from creditors under the Homestead Exemption. The amount varies by state.
If a creditor were to foreclose on your home, it would have to get enough money from the sale of the house to pay off the outstanding mortgage balance, to cover the Homestead Exemption and foreclosure costs, and to pay off the debt you owe to the creditor. In many cases, it doesn’t make financial sense for a creditor to foreclose. Instead, it might decide to write off the unpaid debt as a tax-deductible business loss.
Should You Declare Bankruptcy?
If you have a lot of home equity and a creditor would be likely to foreclose to collect a debt, you might be thinking about declaring bankruptcy to protect your house. If you file for bankruptcy, all your creditors must stop collection activities, but they can ask the court for permission to foreclose on your home. Bankruptcy might buy you some time, but it’s not necessarily a solution.
What to Do If You Can’t Pay Your Debts
If you’re unable to make payments to a loan servicer, credit card company or government, the best thing you can do is to get in touch with the business or tax office and explain your situation. Companies and governments are willing to work with consumers and taxpayers who are struggling to pay their bills, but they are less inclined to cut people slack if they simply ignore bills, letters and phone calls. You may be able to work out a payment plan or to have your loan term or interest rate modified if you are proactive and reach out.
