Question: I sold my home and it is now in escrow with the buyers. I just learned from the escrow company that an old judgment that I discovered on my credit report years ago must be paid in full with interest, because of a lien that they filed against my house. Is this true and is it legal?
When a plaintiff wins a judgment for money, such as an unpaid credit card debt, against the defendant, if the judgment is not fully satisfied very soon after entry of judgment, then the judgment creditor’s attorney usually obtains an “Abstract of Judgment,” which is California Judicial Council Enforcement Form # EJ-001 (“Abstract”).
When the Abstract is recorded with the County Recorder or County Clerk’s office, a lien exists over all real property in that county, including a residence. From that point forward (excluding bankruptcy discharge, in many instances), until the judgment is satisfied in full or the judgment creditor records a release of lien, any sale of real property or attempt to refinance property in the name of the judgment debtor(s) becomes an opportunity for the judgment creditor to be paid.
I know of no title company that would insure the title to a property (which is required by the bank for financing a purchase or refinancing), unless all Abstracts that name any of sellers involved are satisfied in full or a release of lien recorded. Buyers also may be unable to obtain real property financing, if they have an outstanding recorded Abstract. Escrow companies facilitate this payoff process by contacting the judgment creditor’s collection attorney for a written payoff demand. When the collection attorney receives this request, they are supposed to compute how much is due and send a letter of the correct amount, including costs and accrued interest. The escrow company then will deduct the appropriate amount and pay this to the creditor’s attorney, who must provide the documentation that can be recorded to show the judgment has been fully satisfied and the Abstract released.
There are some exceptions to this rule, such as the homestead exemption amount ($75,000 or more, depending on the situation of the occupants and owners, such as age or disability). The homestead exemption protects equity when applied towards purchase of another home within six months. See Cal. Code of Civil Procedure, Section 704.720. My blog posting explains the homestead declaration and links to a sample homestead form.
One point about this process is that there is often abuse by the judgment creditor’s attorney. In particular, there is the temptation to inflate the amount, such as by improperly adding attorney’s fees, demanding excessive fees and costs, and other such nonsense. This might be considered a violation of the Fair Debt Collection Practices Act (FDCPA). Obviously, the damages would be the inflated amount, as this is an attempt to collect more than the amount allowed by law. However, inflating the amount could also make it impossible for the Abstract to be satisfied in full, if the amount is so high that the transaction cannot be closed and the judgment creditor is not willing to sign a release of lien. Thus, damages could also be claimed for preventing the sale or refinancing from being completed.
While you might not have time to consider trying to vacate and set aside an old default judgment, especially if you are in the middle of escrow and need to complete that promptly, please read my blog postings about setting aside a default judgement. If the summons and complaint were not properly served on the defendants, the court lacked jurisdiction over the defendant(s), and even an old default judgment can be set aside by a special type of complaint in equity. Here’s one blog posting in particular, that concerns an old default judgment.