Whether a creditor can place a lien on the house of a debtor who is "paying his debt" depends primarily on whether the payments made by the debtor are in accordance with the repayment schedule established by the contract he executed with the creditor. Regardless of whether the debtor has breached the repayment terms of the contract, the creditor would first have to obtain a judgment for money damages against the debtor before he placed a lien on the debtor's house.
Breach Of Contract
An obligation to repay debt arises out of the existence of a legally binding contract between a creditor and debtor. A debtor who fails to make monthly or other periodic payments in accordance with the repayment provisions of the agreement is in breach of the contract and the creditor has the legal right to sue the debtor for damages. The fact that the debtor is making indeterminate payments is immaterial on the issue of whether he has breached the contract.
Obtaining A Judgment
If the payments made by a debtor are either below the amount required by the repayment terms of the contract or are past the due date, the creditor could file a complaint against the debtor for breach of contract. As a practical matter, in the case of most consumer debt such as credit cards, the creditor will not sue until the debtor has been delinquent for 120-180 days. In the absence of a legitimate defense to repayment, the creditor will usually be awarded a judgment in an amount of the default balance plus accrued interest.
Executing On The Judgment
Once a court issues judgment, the creditor can place a lien on the debtor's real property in the amount of the judgment. One of the reasons creditors obtain liens, even in cases where a delinquent debtor is making payments of some kind, is that it is an effective means of ensuring that the full balance owed will be paid in the future. Since the lien acts as a cloud on the title, the debtor would not be able to sell or transfer the house until he first pays off the creditor.
Considerations
For creditors, litigation is usually the last resort in the collections process, reserved only for the most recalcitrant debtors. For most retail consumer accounts, creditors are primarily interested in receiving periodic payments on the outstanding default balance in an amount consistent with the financial ability of the delinquent debtor. However, if a debtor defaults on his repayment obligations, a creditor has the right to sue, even though the debtor is making good faith nominal payments. Whether the creditor files suit will depend on the age of the delinquent account, the willingness and consistency of the debtor in making reasonable payments and the costs of litigation.
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