Could I lose my house to a debt collector?
Legally, it’s true that debt collectors could get a court judgment that would force you to sell your house to pay off an overdue debt. In practice, however, this rarely happens.
That’s because forcing yourself into an involuntary foreclosure is expensive and time-consuming, says Michael Bovee, debt relief expert and co-founder of Resolve.
“The reason you don’t see it very often is that it’s a very expensive case to pursue in court and consumers can end it overnight with just one filing for bankruptcy,” explains Bovee.
The motivations of debt collectors
Debt collectors want to get paid and they know that if they push you too hard – a category that impending foreclosure would certainly fall into – you could end up. bankruptcy. In this case, they might not receive any money at all or perhaps a lot less than they might otherwise get through other means.
Another reason debt collectors are unlikely to try to take your home is because they can see how much equity you have in your home, Bovee says. Farm exemption laws (which vary by state) allow you to protect a certain amount of the equity in your home against creditors or in the event of bankruptcy. Depending on the value of your home and the amount of your principal protected, a debt collector might have nothing to gain. And if your property is exempt due to the homestead exemption, that’s not an option that debt collectors can pursue.
Other methods used by debt collectors
Instead of trying to take your home, debt collectors rely on other tactics. The most common, of course, is to contact you repeatedly to pay off your debt. Through these calls or letters, they can offer to let you settle your debt for less than you owe.
It’s not uncommon to be sued by a debt collector for a debt, but even if they get a judgment against you in court, that doesn’t mean they’ll try to force you into involuntary foreclosure. More likely, Bovee says, they could use that judgment to garnish your wages, take your bank account, or put a lien on your property.
A lien would mean that if you wanted to sell or refinance your home at some point, you would have to pay off your debt first. (Although debt collectors also know that liens can be erased with bankruptcy.)
“With a privilege, they know they’ll get paid eventually, so why spend the extra money on something?” [with a lawsuit] that people have shown no ability to pay? Said Bovee.
Eventually, if you don’t make payment on a debt, it becomes time-barred, meaning the point at which a debt collector can legally sue you for your debt is passed. Most state debt statutes of limitations are three to six years. But even after a debt is time-barred, that doesn’t mean you no longer owe the debt or that debt collectors should stop trying to get you paid.
Unsecured Debt Against Secured Debt
Of course, if you fall behind on your mortgage or home equity loan payments, you run the risk of losing your home to foreclosure. The same risk is true for your car if you stop making your auto loan payments.
A mortgage loan and a car loan are both secured debt, which means that they are tied to an asset that the lender can recover if you become in arrears on your loan.
Foreclosure, however, is not a lender’s first choice. For one thing, the laws of half the states require lenders to get court approval before they can foreclose on your home, and foreclosure can be a long process. These days, foreclosure rates are quite low. The seizure rate in 2018 was 0.47%, the lowest level since 2005.
Unsecured debts, on the other hand, are those that are not attached to a specific asset. Common unsecured debt includes credit card debt, medical debt, or student loans. In these cases, a debt collector would not be able to go after your house to pay off your debt unless a court accepts it, and again, he or she would be more likely to use the judgment. ‘another way than forcing yourself to sell your house.
Ultimately, it’s highly unlikely, but not impossible, that a debt collector will try to get your home back if you’re behind on a debt. Yet your credit score will be damaged and you will have to deal with debt collectors. You could also possibly be sued for your debt. To prevent this from happening, you may want to consider options to pay off your past due debt, such as negotiate with collectors or enter a debt management plan.