A creditor is “secured” when it holds an interest in an asset that belongs to a debtor. The asset the secured creditor owns a security interest in is called “collateral.” A mortgage lender is just one example of a secured creditor because it has the legal right to foreclose on the borrower’s property if he leaves his loan unpaid. Although not traditionally secured creditors, judgment creditors can secure an individual’s debts in certain situations.
A judgment creditor is any unsecured creditor that obtains a money judgment against a consumer via a lawsuit. Secured creditors have no need to seek a judgment because of their ability to seize the borrower’s collateral. If the collateral does not satisfy the borrower’s debt, the remaining amount she owes is unsecured because seizing collateral is no longer an option. Thus, a secured creditor becomes an unsecured creditor after calling due its security interest. Judgment creditors are, by nature, unsecured.
Although judgment creditors are unsecured, a creditor’s possession of a judgment gives it the ability to secure the debt via a lien. Only creditors with a judgment and federal and state governments can attach an involuntary lien to a debtor’s property. Property liens often attach to real estate but a judgment creditor can also attach its lien to a car or boat. Once the judgment creditor attaches the lien, the property the lien is attached to becomes its collateral and the formally unsecured debt is secured by the asset.
Collection Via Collateral
A judgment’s creditor’s primary motivation for becoming secured through a lien is that doing so increases the odds that the debtor will pay off the judgment rather than risk losing the asset. Like any secured creditor, a judgment creditor who is also a lien holder can seize the asset to which its lien is attached if the debtor refuses payment.
Sometimes threatening to seize the asset is not necessary. As a rule, consumers cannot sell or refinance a home or vehicle without first paying any outstanding judgment liens attached to the asset.
A creditor must have a judgment before filing a lien against an individual’s personal property. This requires a lawsuit and court ruling in favor of the creditor. The one exception to this rule applies to federal tax debts. The Internal Revenue Service can attach a blanket lien to all of an individual’s assets at once should he fail to pay his tax debts. The IRS does not have to become a judgment creditor by filing and winning a lawsuit against the consumer in order to do so.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.