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In today’s uncertain economic climate, some consumers are worried about paying their bills. Gery in Florida wonders if credit card lenders can come after his rental property in Florida if he is unable to make his card payments. He also owns a principal residence on which he claims a homestead exemption.
“With everything that has happened, my wife risks losing her job,” writes Gery. “We have significant credit card debt and are worried that if she loses her job we won’t be able to make ends meet, let alone pay our balances. Everything has become so much more expensive, even our rental is no longer profitable. We would most likely lose the tenant if we increased his rent.
“If she loses her job and the impact becomes too much to bear, will the credit card companies force us to sell the property we are renting to pay off the credit card obligations? I can only assume that in the event of bankruptcy the courts can force us to liquidate the property, but filing for bankruptcy is not on the table for us.
Creditors should get a judgment against you
Lenders will want their debts paid off, but they can’t just seize your property to satisfy their claims. They will have to go to court and present their case. If they file a complaint against you, you will receive a subpoena to answer the case.
You must respond to the invitation in a timely manner, as you will have a deadline to provide your contribution. The response time varies and will depend on your location. If you do not respond to this summons, you will probably lose the default file since you did not present your file. So be sure to respond as soon as possible. If a creditor prevails in a case against you, they are said to obtain a judgment against you.
Armed with this judgment, the creditor can place a lien on your property that will taint the title deed. This means that you will be prevented from selling or refinancing the property without clearing that claim against it.
Don’t expect the homestead exemption to cover rental property
A judgment lien would allow a creditor to force you to sell your property. Whether or not they do so will depend on how much debt they expect to recover from the sale. It costs a considerable sum to pursue a sale of property, so a creditor should be sure that the profit would be worth pursuing this remedy.
The net proceeds from a sale will first be used to pay off any mortgages on the property, then other liens, such as a mechanic’s lien set up by a tradesperson, appraisal liens or liens tax. If the property is your principal residence, it usually has a homestead exemption that protects the equity in your property from seizure by creditors.
However, this homestead exemption does not apply to rental properties in Florida, and generally in other states as well. To qualify for the homestead exemption on a property, it would have to be your principal residence. If the property does not qualify for the Homestead Exemption, creditors may find it useful to force you to sell it. This will depend on how much money the creditor will receive after paying the costs of pursuing a sale and the residual value of the property (after paying off a mortgage and any other liens).
Cancellation of debts in the event of bankruptcy
Going through bankruptcy proceedings to get your debt canceled will give you a fresh financial start, but it will have serious repercussions on your credit report and your financial life. Bankruptcy should only be considered if no other courses are available.
If a creditor holds a lien on your rental property, credit card debt (which is unsecured debt) will become secured debt, since the lender will have a claim on your property. It won’t be easy to avoid paying this debt through the bankruptcy process if you have equity in the property.
If the credit card lender does not have a lien on your rental property, you may be able to discharge unsecured credit card debt through the bankruptcy process.
It would be best to consult with an attorney about your individual situation to determine if filing for bankruptcy will be a good option for you.
The bottom line
If you haven’t tracked your credit card payments, the card issuer can get a court judgment against you to pay your debt. He will have a claim on your rental property if he then places a judgment lien on it. This lien means that the title to your property is unclear. It will be difficult for you to refinance or sell the property without meeting this demand.
Rental properties generally do not benefit from the homestead exemption that protects the equity in principal residences. This means that the creditor might find it useful to force the sale of your property if it is equity rich. Gery, you should consult a bankruptcy lawyer who can provide you with information specific to your situation.
Contact me at [email protected] with your credit card questions.