A Dramatic and Effective Remedy – That Should Rarely Be Used
Usually, as soon as a judgment is entered against an individual, the first question a creditor asks is, “Can I force her to sell her house?” If your judgment debtor owns property, it is by far the most tempting target for enforcement, especially if it is the debtor’s home. Even starting the process frequently leads the debtor to either make a good faith settlement offer or file for bankruptcy.
Nevertheless, the procedure is seldom used. The reasons are twofold: the legal procedures are expensive and onerous, and, as a practical matter, a sale rarely results in satisfaction of the judgment.
Procedural Headaches
The execution sale of real property used as the debtor’s dwelling begins with a levy by the Sheriff or registered process server. Levying officers require a fee and cost deposit before performing real estate levies. These deposits vary by county, but are usually in the range of $400 to $600. Once the deposit is made and levy instructions are provided to the Sheriff, the levying officer will record a copy of the Writ of Execution and a Notice of Levy. These documents are then served on (1) at least one occupant, (2) the judgment debtor, and (3) the owner of record. While these three requirements are usually met by serving the judgment debtor, that is not always the case. The levying officer is required to give prompt notice when the levy is completed, because the judgment creditor has 20 days after receiving notice of the levy to file an application for an order allowing the sale.
Before this occurs, the creditor would be well advised to gather an abstract or certified copy of the judgment, a litigation guarantee from a title company, an appraisal from an independent appraiser, and should calculate the number and amount of liens on the property. All of this information will be required for the application. After receiving the Application, the court schedules a hearing and provides the creditor with notice. The creditor must then serve the debtor and any occupant at least 30 days prior to the hearing date.
The Homestead Exemption
The purpose of the motion is really to determine the value of the homestead exemption and to assure that the debtor is paid that amount if a sale occurs. The amount of the exemption is calculated pursuant to California Code of Civil Procedure Section 704.730. It is, at a minimum, $75,000. It is $100,000 if the judgment debtor resides with a family member who has no ownership interest in the property. It can be as high as $150,000 if debtor or her spouse is disabled, over 65, or over 55 and earns less than a certain specified amount.
At the hearing, the court will determine the amount of the homestead, determine the fair market value of the dwelling, and order the levying officer to conduct an execution sale. Note that, at this point, it is approximately three months since the decision to force the sale, and the sale has not occurred yet.
The Minimum Bid Required Is Severe
As noted above, the order for sale will include a determination of the fair market value of the property as well as the number and amount of senior liens that must be paid from the sales proceeds before funds are distributed to the judgment creditor. However, Code of Civil Procedure Section 704.800 sets the minimum bid requirements for the execution sale of a dwelling, and they are severe.
The sale must generate a bid that exceeds all liens and encumbrances on the property, as well as the homestead exemption, combined. In addition, the bid must exceed 90% of the fair market value as determined by the court. If no bid is received that meets both of these requirements, the levying officer must release the property back to the judgment debtor, and there is a stay on attempting another order for sale for one year.
Practical Considerations
For most residential properties, there is going to be at least one mortgage. Any such secured property interest must be paid before any distribution is made to the judgment creditor. So, considering a hypothetical, let’s say we have a judgment against a married couple. One spouse is unemployed, the other is self-employed, and so wage garnishment will yield no results. Attempts to locate a bank account have failed. But they own their house.
Is it worth it for the creditor to force a sale? The first consideration is simple: we must add up the liens and encumbrances with the homestead exemption, and subtract this figure from the fair market value. Suppose some online research determines the approximate value of the house to be $300,000. A database search or title guarantee report reveals a first mortgage of currently $180,000, and a second mortgage of $30,000.
In this situation, the answer is definitely “no,” the creditor should not start the process for a forced sale. The homestead, since we have a married couple living together at the dwelling, is $100,000. Therefore, the encumbrances plus the exemption totals $310,000, which exceeds the fair market value. The court will not even issue the order for sale.
Now let’s say the fair market value is $350,000. Should the creditor force a sale now? We can now obtain an order, since, on paper, the debtor has $40,000 in equity. However, the auction would have to generate a bid of $315,000, or 90% of the value, to meet the minimum bid requirements. Given the nature of a Sheriff’s execution sale, it is highly unlikely that will be achieved.
However, even in this scenario, it is probably advisable to file and serve the application. Imagine the impact when the couple is served with a Notice of Levy for their home! In every case where I’ve taken it this far, the result is an immediate phone call from the debtor. It’s remarkable how debtors can suddenly find the means to pay a debt when their home is on the line.
Conclusion
In California, the minimum bid requirements to force the sale of the debtor’s dwelling make it difficult to execute such a sale in most situations. The only situation where a sale is certain to yield a benefit is where the debtor holds a lot of equity in the property, meaning the property is valuable and the debtor does not have to carry a large mortgage. People in that situation usually pay their bills, and do not end up with substantial judgments against them.
Most debtors will fall into the gray area discussed in our hypothetical: enough equity to obtain an order for sale, but unlikely to generate the necessary minimum bid. In this case, the creditor must carefully weigh the psychological impact on the debtor of receiving the notice of levy, against the time and expense of obtaining an order for sale. The creditor is always better off considering other avenues of enforcement before forcing the sale of the debtor’s house.
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