Legally, it’s true that debt collectors could get a judgment in court that would force you to sell your home to repay a delinquent debt. In practice, however, this rarely ever happens.
That’s because forcing you into an involuntary foreclosure is costly and time-consuming, says debt relief expert and Resolve co-founder Michael Bovee.
“The reason you don’t see it very often is that it’s a very expensive thing to pursue in court and consumers can put a stop to it overnight with one bankruptcy filing,” Bovee says.
The motives of debt collectors
Debt collectors want to get paid and they know that if they push you too hard — a category that an impending foreclosure would certainly fall under — you might wind up filing for bankruptcy. In that case, they might not get any money at all or possibly far less than they otherwise could get through other avenues.
Another reason debt collectors are unlikely to try and take your home is that they can see how much equity you have in your home, Bovee says. Homestead exemption laws (which vary by state) allow you to protect a certain amount of equity in your home from creditors or in a bankruptcy. Depending on how much your home is worth, and how much protected equity you have, a debt collector might not have anything to gain. And if your property is exempt because of the homestead exemption, that’s not an option debt collectors can pursue.
Other methods debt collectors use
Instead of attempting to take your home, debt collectors rely on other tactics. The most common, of course, is repeatedly contacting you to pay your debt. Through those calls or letters, they may offer to let you settle your debt for less than what you owe.
It’s not uncommon to be sued by a debt collector over a debt, but even if they win a judgment against you in court, that doesn’t mean they will try to force you into involuntary foreclosure. More likely, Bovee says, they could use that judgment to garnish your wages, levy 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 repay your debt first. (Although debt collectors also know that liens can be wiped out with bankruptcies.)
“With a lien, they know they’re eventually going to get paid, so why throw additional money at something [with a lawsuit] that people have shown no ability to be able to pay?” Bovee says.
Eventually, if you don’t make a payment on a debt, it becomes time-barred, which means it’s past the point where a debt collector can legally sue you over your debt. Most state’s debt statutes of limitations are between three to six years. But even after a debt becomes time-barred, it doesn’t mean you don’t owe the debt anymore or that debt collectors have to stop trying to get you to pay.
Unsecured vs. secured debt
Of course, if you fall behind on your mortgage payments or your home equity loan payments, you run the risk of losing your home in a foreclosure. The same risk is true of your car if you stop making your car loan payments.
Both a mortgage and a car loan are secured debts, meaning they are tied to an asset that the lender can go after if you become delinquent on your loan.
Foreclosure, though, isn’t a lender’s first choice. For one, the laws in half of the states require lenders to get court approval before they can foreclose on your home and foreclosure can be a lengthy process. These days, foreclosure rates are fairly low. The 2018 foreclosure rate was 0.47%, the lowest level since 2005.
Unsecured debts, meanwhile, are those not attached to a specific asset. Common unsecured debts include credit card debt, medical debt or student loans. In those cases, a debt collector wouldn’t be able to go after your home to repay your debt unless a court agreed, and again, they would be more likely to use the judgment in other ways aside from forcing you to sell your home.
At the end of the day, it’s very unlikely, though not impossible, that a debt collector would try to take your home if you’re behind on a debt. Still, your credit score will be damaged and you’ll have to deal with being hounded by debt collectors. You also might eventually be sued for your debt. To avoid that happening, you may want to consider options for repaying your delinquent debt, such as negotiating with collectors or entering into a debt management plan.