If you fail to repay an unsecured debt, your creditors can petition the court to have a lien placed on your home. Creditors can even file to have a lien placed on your primary residence or homestead. However, in most states laws exist that make it difficult for unsecured creditors to place such liens, and in many instances lenders gain very little by trying to secure these debts.
Forty-six states have laws that enable you to file a homestead declaration, which means that you officially acknowledge your home as your primary residence. In some of these states, such as Florida, creditors cannot typically place a lien on your home if you default on an unsecured debt. In Montana, state laws prevent unsecured creditors from placing liens against the first $250,000 of the value of your home. States such as California and Massachusetts have similar rules. New Jersey, Rhode Island, Pennsylvania, Delaware and Washington, D.C., have no rules in place that prevent creditors from placing a lien on your home when you default on an unsecured debt.
While most states have laws that limit the ability of your creditors to place liens on your homestead, the laws generally include certain exclusions. In many instances, homeowners associations and local governments can place liens on your homestead. In Montana, you are not protected if a creditor obtains a judgement before you file the homestead declaration. In California, you get an exemption that depends on factors such as your age and the number of people that live in your home. Therefore, homestead exemptions do not always protect you from your creditors.
You can protect your home from unsecured creditors if you file Chapter 13 bankruptcy. When you file Chapter 13, your debts are reorganized and you have between three and five years to repay your creditors. During the bankruptcy process, you must continue to pay your first mortgage but your other debt payments are frozen and your creditors cannot take action against you during this time. Bankruptcy laws are set at the federal rather than the state level, which means the same protections apply to homeowners in all states.
A lien represents a claim on your property, but a lien may mean nothing if the liens that are attached to your home exceed the property value. If you have a mortgage and other debts already secured to your home, then you may have insufficient equity to cover any more debts. An unsecured creditor could ask a judge to place a lien, but if the home goes into foreclosure the existing liens are paid in order of seniority so the junior lien holders may not get any of the sale proceeds. Considering the legal expense of filing a lien, it makes no financial sense for a creditor to place a lien unless you have equity in your home.
- Chicago Title Connection: Homestead Declaration
- Montana State University; Using a Homestead Declaration to Protect Your Home from Creditors; Marsha A Goetting
- Ashrlaw.com; Homestead Declarations in the Fifty States; Philip R. Rupprecht and Lisa B. Querard
- Washington State Office of the Attorney General: Real Property
- United States Courts: Individual Debt Adjustment