If a creditor gets a court judgment against you, that creditor may place a lien, called a "judgment lien," on your home or other property. Then, if you stop making your mortgage payments and your lender forecloses your home, the judgment lien is typically wiped out by that foreclosure.
Whether the judgment lienholder gets paid any money from the foreclosure sale depends on whether funds are available after the mortgage lender and priority liens get paid in full. Even if a lien is eliminated in a foreclosure, you're not necessarily off the hook for the debt.
How Judgment Liens Work
If you owe money to a creditor, that creditor might file a lawsuit against you in court for the money you owe. Should you lose the case, the creditor gets a judgment against you.
Usually, that creditor may then file the judgment with the county to get a judgment lien on any real estate you own. The creditor is then called a "judgment lienholder."
Once a judgment lien attaches to your property, that lien has to be resolved before title to the home can be transferred free and clear to another owner. So, if you're selling or refinancing the home, usually you’ll have to pay off the lien. In a foreclosure, the lender forecloses the lien (assuming that the lender's lien has priority over the judgment lien) to get clear title to the property.
What Happens to a Judgment Lien in a Mortgage Foreclosure?
If you stop making your mortgage payments, your lender will likely foreclose. But before the lender starts a judicial foreclosure by filing a lawsuit against you in court, the lender’s attorney orders a title search to see if any liens have attached to the property.
Examples of different types of liens include judgment liens, municipal liens, property tax liens, and junior mortgage liens. A judgment lien recorded after a mortgage is inferior to that mortgage and can be foreclosed. ("Inferior" means that the lien doesn’t have priority.)
To extinguish (get rid of) an inferior judgment lien and get clear title, the lender’s attorney includes the judgment lienholder in the foreclosure lawsuit. The judgment lienholder gets the opportunity to respond to the suit to argue that the lien is not inferior to the mortgage lien for some reason.
But it’s unlikely that the judgment lienholder would successfully claim its lien is superior to the mortgage. So, most judgment lienholders don’t respond to a foreclosure lawsuit.
If the judgment lienholder doesn’t respond to the lawsuit, the lender gets a default judgment against the lienholder, eliminating the judgment lien. Assuming the foreclosure is proper against all parties, including the homeowner, the court enters an order of foreclosure. The home is sold at a foreclosure sale to satisfy the homeowner's mortgage debt.
If any surplus funds remain after the foreclosing lender is fully repaid, the remaining money goes to other creditors holding junior liens, such as second mortgages and judgment lienholders.
Example. Suppose you owe $300,000 on your first mortgage. You also have a home equity loan (a second mortgage) on the property for $50,000, and a creditor has a $10,000 inferior judgment lien on the property. You stop making payments on the first mortgage, and the lender forecloses. The home sells for $350,000 at the foreclosure sale. The first mortgage holder gets fully paid back ($300,000), and the home equity lender gets fully paid ($50,000). Ordinarily, the judgment lienholder would get paid out of whatever is left over after the priority liens are paid off. But in this example, the judgment creditor gets nothing because there’s no more money left to distribute. Ultimately, the judgment lien is extinguished, and the judgment lienholder gets no money from the foreclosure.
What Happens After a Judgment Lien Is Extinguished
Following a foreclosure, all junior liens, like judgment liens, are extinguished, and the liens are removed from the property's title. But any debt associated with a judgment remains, even though the lien is no longer attached to the foreclosed property.
While the security for the debt has been eliminated, the obligation remains in place. And it can attach to any other real estate you own now or in the future. The judgment creditor might try to collect the debt in other ways, like by freezing your bank accounts or garnishing your wages.
Judgment Lien Foreclosures
A judgment lienholder can choose to foreclose your home to get paid. But judgment lienholders rarely foreclose because it takes effort and money to foreclose and, in most cases, the lienholder doesn’t get anything out of the foreclosure sale because mortgages or other liens have priority.
Getting Help
If you are facing a foreclosure and have questions about whether the foreclosure will extinguish a judgment lien or other types of liens on your home—or if you have questions about how the foreclosure process works—consider talking to a local foreclosure attorney.