I continue to get questions about judgements on credit reports and how to pay them off to get a mortgage. The flood of credit cleaning scams in the past decade have led some people to think that anything bad can be erased from your record if you just find the right place to ask.
A judgement happens when someone wins a case against you and there are monetary damages awarded to the other side. In most of the cases we are talking about here, a past due debt went to collection and when it still was not paid, the collection agency took it to court and got a judgement in the amount owed, plus interest and legal fees.
What’s the difference between a collection and a judgement? A collection is when someone you owe money to stopped waiting and turned your account over to a third party to try and collect the money for a percentage. There are laws about how those collectors can conduct business, but usually having an outstanding collection means you’ll be getting harsh letters in the mail and demanding phone calls trying to get you to respond with a payment.
A judgement usually happens when the amount owed is over $500. This is not necessary, but since there are filing fees and attorney fees involved, the amount usually has to be worth collecting. Some creditors routinely turn everything over to collection and then file a judgement, just on principle.
The creditor presents the evidence of the debt to the judge. If you attend the hearing, you might be given an opportunity to debate the validity of the debt, but you should have really handled the dispute long ago, before it even went to collection. If you DID dispute the amount for some reason, now is the time to have all that proof at hand to show the judge your situation.
The fact that you owe money and just don’t have money to pay it back is not a good excuse and will not help you when it comes to collections or judgements either one.
If the creditor wins the judgement then public record will reflect the date, the creditor and the amount. This public record will show up on most credit reports and will create a lien on any real property that you own. Winning a judgement does not automatically produce funds; it just gives the creditor more standing in their efforts to collect the money.
The next step in collecting the money is to pursue your assets and lay claim to them if you do not pay. Many times this step never happens, but if the creditor has knowledge that you own something of value, they may file a petition to discover assets and you will have to explain to the judge how you intend to pay the judgement to avoid selling your property for funds.
This asset discovery process and the fact that judgements are a lien against real property is the reason that mortgage lenders do not want to loan money on a home with outstanding judgements. The lenders mortgage lien needs to be in first position.
If you have a judgement against you it might not preclude you from buying a home. If you have a payment arrangement in place and a history of making those payments, the lender could make an exception and not require you to pay it off. Payment arrangements that were set up just after you were rejected by a prevous lender aren’t going to cut it, though.
Keep in mind that the whole purpose of credit underwriting is to determine whether you understand the ramifications of borrowing money and paying it back on time. Every underwriter has seen situations where “life events” caused major blemishes on a credit history. The borrowers who prevail in that situation are the ones who have done their best to pay off and keep current on their debts so that the underwriter can see that they take their financial obligations seriously.
Copyright: Judi M Moore, 2rHouse.org, August 26, 2005, all rights reserved