It’s frightening to think of someone legally seizing your home, but it can happen if you lose a lawsuit or fall too far behind on your mortgages or taxes. Here’s what you need to know about home seizure.
Types of legal judgment
Courts can order the seizure of your assets, including your home, in three scenarios.
- You are liable for car or home accident damages, and your insurance is insufficient to cover them.
- You default on your mortgage.
- You owe back taxes.
Some states’ laws include homestead protections that offer some protection against home seizure in the first scenario. Fewer protections exist in the case of mortgage foreclosures or tax debts.
Civil liability
If you injure someone in a car accident or they are harmed on your property, you may be liable for damages to that person. Another common liability judgment arises when an unpaid contractor files a lien against your property to collect for work done.
Your home and auto liability coverage protects you – up to policy limits – if you are found to be at fault in an accident. Having adequate liability coverage is essential for your protection because when a judgment awards the injured parties more than your coverage maximum, you are personally liable to cover the excess. Your real estate, as well as your financial accounts and vehicles, can be legally seized and sold to cover the remainder of the damages. Your wages can even be garnished.
When your insurance does not cover a judgment, the court orders an inventory of all your assets. It determines whether the equity in your real estate is sufficient, along with your other assets, to cover the judgment. If so, the property is sold, the first lien mortgage is paid, and the equity is used to settle the judgment. The owner is paid any leftover amount.
Some states have homestead protection laws that set an exemption amount of equity that cannot be taken to fulfill a judgment. Your home cannot be taken and sold if your equity is less than the exemption amount. If equity exceeds the exemption amount, it can be. Thirty-five states have some version of a homestead exemption, but exemption amounts vary from only a few thousand dollars to a few hundred thousand.
This means it’s important to consult with your insurance professional. Your home and auto policies should have liability limits of $250,000 to $500,000, plus a $1 million umbrella policy that pays if a judgment exceeds your policy limits.
Mortgage foreclosure
When a borrower defaults on his mortgage and fails to work out a plan with the mortgage company for forbearance or reduced payments, the mortgage company files for foreclosure. The homeowner is evicted, and the property is auctioned to pay off the mortgage.
As a result, it is essential to stay in touch with your mortgage company and work out an alternative payment plan if you fall behind on payments. Foreclosure is an expensive process mortgage companies want to avoid, and they will work with you.
Tax liability judgments
In the event of a tax debt, the county tax assessor or the IRS can file a tax lien on real estate to collect delinquent amounts.
The county tax assessor will go after the property. The IRS can seize financial accounts or garnish wages to settle a federal tax liability. Seizing a person’s home is a last resort when other means of paying off the IRS debt are insufficient.
If you need to catch up on your taxes, work with the taxing entity first to set up a payment plan or, in some cases, a settlement for less than the total amount owed. A tax attorney can help negotiate such compromises.
Asset transfers to avoid judgment
Sometimes, people at risk of a lawsuit may switch the title of their assets out of their name to a family member or into a trust. Such a maneuver must be done before a suit is filed. If done after, the court could invalidate the transfer as fraudulent.
Related – Can They Do That? Taking Property Under Eminent Domain
