If you do not make payments on a debt and fail to make arrangements with your creditor to pay your past-due amount, the creditor may consider the debt in default and sue you for the entire amount of the debt. If the creditor wins the lawsuit, the court will award the creditor a judgment, which typically includes interest and court costs. In some cases, a judgment may allow the creditor to take your property, even if a lienholder has an interest in the property.
Equity
The ability of a creditor to successfully liquidate personal property to satisfy a judgment debt typically hinges on the amount of equity the debtor has in the property. The lienholder has a primary interest in the property, which must be satisfied before the judgment creditor can receive any funds from liquidation. If the debtor has insufficient equity in the property, the payoff for the creditor will not likely justify the judgment creditor's costs incurred for seizing and liquidating the property.
Exemptions
Exemptions imposed by state law can further reduce a judgment creditor's ability to realize gain from the seizure and liquidation of personal property. Several states provide exemptions for personal property; for example, Indiana exempts $7,500 in home equity if the judgment debtor is single and $15,000 if the debtor is married and the creditor holds a judgment against both spouses. This means that a debtor in Indiana may have up to $15,000 in equity in his home without the judgment creditor taking the property.
Lien
Because liquidating property is expensive, a judgment creditor will typically instead place a judgment lien on personal property and pursue active collection through other means such as bank levies and wage garnishment. A lien gives the judgment creditor a possessory interest in the property, which prevents you from selling or giving the property away without first paying off the judgment debt.
Statute of Limitations
A judgment creditor typically does not have to seize and liquidate personal property immediately after obtaining a judgment. Each state provides a statute of limitations that dictates how long a creditor can pursue payment of a judgment debt. For example, Alabama provides a statute of limitations of 20 years for domestic judgments. This means that a judgment creditor can place a lien on your personal property and wait until you accrue enough equity to make liquidation a financially effective option.
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