Total Real Estate Group


Question: I am a real estate broker and represent a homeowner trying to do a short sale as the home’s fair market value is less than the amount of the first position loan. An offer has come in, acceptable to the homeowner, and the lender has agreed to accept a discounted payment in exchange for a release of the trust deed and waiver of any deficiency claim. However, there is a judgment lien against the home arising from the homeowner’s failure to pay certain medical bills. The judgment creditor will not release the judgment lien for less than the full amount it is owed, and is preventing the short sale from moving forward. The homeowner occupies the home. Can anything be done to help the client and enable the short sale to close?

Answer: Absolutely! In your scenario, the homestead exemption can be used to force a discharge of the lien of the judgment creditor and permit the sale to occur without any payment having to be made to the judgment creditor.

Under Oregon law a homeowner’s interest in the home they live in is exempt from execution by a judgment creditor up to the amount of $40,000 (for a single homeowner), and $50,000 (for joint homeowners). This homestead exemption does not apply to voluntary lien creditors, such as the lender who provide the homeowner with a loan and took a trust deed or mortgage to secure the loan. But, it does apply to judgment lien creditors (with certain exceptions for support judgments) – those are the creditors such as a credit card company, or a doctor or hospital, who sued the homeowner and got a judgment, which then becomes a lien against the home. Effectively, other than amounts owed to voluntary lien creditors, the homeowner gets to keep the exempt amount from the sale proceeds, if there is any, before any judgment lien creditors get paid, provided the proceeds are retained by the homeowner for the purpose of securing another homestead within a year. This applies where some judgment lien creditor takes steps to execute on (foreclose), the homeowner’s interest in the home.

But what can be done if the judgment lien creditor is doing nothing, and the homeowner wants to sell the home for less than what the homeowner owes the first position lender? This is where ORS 18.412 comes into play, and here are the basic steps:

A. Homeowner first determines if the homeowner qualifies for the homestead exemption.

B. Homeowner determines the fair market value of the property and puts it on the market for sale at that value.

C. Proposed sales price of the home is less than the amount owed the first position lender. ,

D. Offer is received acceptable to the homeowner, and it is confirmed that the first position lender will accept a discount payment – i.e., less than what is owed under the loan, and will release its trust deed or mortgage against the home, and release any deficiency claim against the homeowner.

E. The homeowner (actually even the buyer could do this) gives formal statutory notice to the judgment lien creditor that the homeowner intends to discharge the judgment lien as a lien against the home (a copy of the notice must also be filed with the court), and identifies the current fair market value of the home (presumably the short sale purchase offer, and the acceptance by the lender, is competent evidence of this value);

F. The judgment lien creditor has 14 days from the date of the notice to object and request a hearing. If the judgment lien creditor timely objects, there will be an expedited hearing set to hear the objections (likely objection would be that the home is worth more than the stated current fair market value, but the burden of proving this will be on the judgment lien creditor);

G. If no timely objections are filed by the judgment lien creditor, (or, if objections are filed, the judgment lien creditor’s objections are rejected by the court), the homeowner can apply to the court for an order discharging the judgment lien as an lien against the home, and proceed with the short sale, without the judgment creditor having to be paid anything as a result of the sale.

Yes, there is work to be done, but for that homeowner who wishes to move on, and put the problems with their existing home and loan behind them, this is a way to do it. From a negotiating standpoint, once the judgment creditor knows that the homeowner is going in this direction, there may be leverage to negotiate a substantially discounted payment to the judgment lien creditor to release the judgment lien and avoid the costs of the court process.

Caveat: the discharge of the judgment lien does not mean that the debt goes away. It will still exist, but will not be a lien against the home preventing the short sale. Again, however, the above procedure and the short sale may be the best opportunity for the homeowner to negotiate a discounted payment which will be accepted as full payment of the judgment lien.


Disclaimer: this column does not constitute the giving of legal advice, and your reading this column does not create an attorney/client relationship. You are encouraged to consult a lawyer or accountant should you have questions about how this information may be applicable to your particular situation.