From Courtroom to Collections: How Judgment Liens Tip the Scales for Creditors
Whether obtained by default, through a dispositive motion, or after a hard-fought court battle, a money judgment is nothing more than a piece of paper. Yes, a court order definitively establishes that the defendant owes the victorious plaintiff the sum specified in the judgment. But unless that defendant politely opens their checkbook and ponies up to satisfy their legal obligation, the judgment alone will not put money in the plaintiff’s pocket. Rather, concerted and strategic collection efforts will be required to effectuate the judgment.
Recognizing that many, if not most, judgment debtors won’t voluntarily step up and pay, the law provides judgment creditors with a robust arsenal of weapons they can use to collect what they are owed. Perhaps the most powerful of those weapons is the judgment lien.
What Is a Judgment Lien?
A judgment lien is a legal claim on a debtor’s assets and property that arises from a money judgment in favor of a creditor. However, a judgment by itself does not create the lien, and the creditor must take additional steps to “perfect” it, turning a judgment suitable for framing into an actionable and enforceable legal right.
This is accomplished by filing the lien with the county recorder or registrar of deeds in a county where the debtor owns property. Once filed, the lien becomes an encumbrance on any such property, along with any other such interests, such as a mortgage, home equity loan, or tax lien.
Unlike those other encumbrances, however, a Michigan judgment lien cannot be foreclosed upon, and the lienholder can force a sale of the property. The power of the lien manifests if and when the judgment debtor tries to sell or refinance the property, as they will be unable to do so until and unless they pay off the lien and obtain a release from the judgment creditor.
Priority of a Judgment Lien
One of the most significant factors determining how effective a judgment lien will be in collection efforts is its priority, which determines the order in which creditors are paid if the debtor’s property is sold or liquidated. Generally, the rule of “first in time, first in right” applies, meaning the first creditor to file a lien on a property has priority over subsequent creditors. This means if multiple creditors have claims against a debtor, the creditor with the earliest recorded lien will receive proceeds first, assuming the property has enough equity to cover numerous claims.
However, certain other liens may take precedence over judgment liens, including tax liens and purchase-money mortgages. Accordingly, it is crucial for creditors to understand how priority works in their jurisdiction and to file their liens promptly to avoid losing out to other claimants.
Judgment Lien Creditor Rights in Bankruptcy
Collection efforts generally, and a judgment lien’s power and value, in particular, become murkier if the debtor files for bankruptcy protection. When a debtor files for bankruptcy, it triggers an automatic stay, which halts most collection actions. However, judgment lien creditors still hold a secured claim in bankruptcy and retain rights that unsecured creditors do not. Secured creditors have a legal interest in specific property (in this case, the property subject to the lien), which gives them a higher priority regarding repayment. In a Chapter 7 liquidation, for instance, secured creditors are paid from the sale of the debtor’s assets before unsecured creditors.
In a Chapter 13 case, where the debtor seeks to reorganize their debts, secured creditors are entitled to receive payments that reflect the value of their collateral. If the property subject to the judgment lien is sold during the bankruptcy, the lien must be satisfied from the proceeds.
While judgment lien creditors enjoy secured status, their lien can still be vulnerable to avoidance in certain circumstances. Under the United States Bankruptcy Code, a debtor may avoid a judgment lien if it impairs an exemption the debtor is entitled to claim in the property. For example, if the debtor’s homestead exemption protects a certain amount of equity in their home, and the judgment lien encroaches on that exemption, the debtor can ask the court to avoid the lien to the extent that it impairs their exemption.
This avoidance power is designed to give debtors a fresh start by ensuring they can retain some essential property (like their home or car) without being overly burdened by creditor claims. However, the debtor must take affirmative steps to avoid the lien, which doesn’t happen automatically.
Expiration and Renewal of Judgment Liens
Judgment liens do not live forever. In Michigan, judgment liens are generally valid for five years, after which they expire unless renewed. Creditors must be vigilant in tracking the expiration date of their liens and file for renewal if they wish to maintain their interest in the debtor’s property. However, a judgment lien may only be renewed one time and it may not be renewed less than 120 days prior to the expiration of the initial judgment. Failure to renew the lien can result in the creditor losing their secured status, leaving them as an unsecured creditor with significantly fewer rights in bankruptcy or collection proceedings.
Whether you’re a creditor seeking to enforce your rights or a debtor facing judgment liens, having experienced legal counsel to guide you through the process is essential to effectively assert and protect your rights. If you have any questions or would like assistance, please contact Nolan J. De Jong or another member of Maddin Hauser’s Bankruptcy, Restructuring, and Debtor-Creditor Rights team.