Homestead

Protection from Creditors

Our system of creating and enforcing debts creates significant risk that homeowners may lose ownership and possession of their homes. Homeowners incur debts on a regular basis for a multitude of different purposes. Some debts result from voluntary transactions, such as mortgage loans, utility contracts (electric, natural gas, etc.), credit cards, student loans, or business loans. Other debts arise involuntarily. For example, a person may become liable in tort for negligently causing an automobile accident, may fail to pay taxes when due, or may have child support obligations. When a debtor fails to pay the debt when due, the law generally allows the creditor to collect the debt by forcing the sale of the debtor's property. Often but not always the creditor must first bring an action in court against the debtor. One important distinction that bears on the nature of the creditor's proceedings and the debtor's rights is whether the debtor holds a secured debt or an unsecured debt. When a person voluntarily incurs a debt, at the inception she may grant a security interest, mortgage, or lien to the creditor, specifying property that serves as collateral. Such a creditor holds a consensual lien. When a creditor holds unsecured debt (that is, has no consensual lien), the creditor can generally still force the sale of the debtor's property, but first must take legal steps to obtain a lien on the relevant property. A creditor who takes the proper steps obtains an involuntary lien on the property, which then leads to a forced sale to pay the debt. The most common type of involuntary lien is a judgment lien, obtained after the creditor sues the debtor and obtains a judgment ordering payment of the debt. A judgment lien attaches on various types of property owned by the debtor, including the debtor's home.

During the 19th century, states adopted laws to protect homesteads from debt collection. The homestead laws generally allow owners to exempt their principal residence (the “homestead”) from involuntary liens. Consensual liens are generally treated differently. In all states today, the law permits a person to grant a mortgage to a lender to finance the purchase of a home, to grant a mortgage to refinance an existing home loan, or to grant a mortgage to secure a home equity loan. In all three instances, the creditor may foreclose if the owner defaults. Homestead laws do not prevent such creditors from foreclosing.

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