Underwriting Q&A: If the subject property is the seller’s homestead, can I remove the abstract of judgment against the seller (debtor) from the Commitment?

Q: If the subject property is the seller’s homestead, can I remove the abstract of judgment against the seller (debtor) from the Commitment?

A: Texas– No. The Texas Constitution exempts a homestead from forced sale by creditors, except those constitutionally permitted liens enumerated in the constitution. However, if a judgment lien is recorded, it can still cast a cloud on the title and steps will need to be taken to effectuate a release as to any homestead property, removing the cloud on title. There are two ways to proceed with releasing the judgment as to the debtor’s homestead, depending on the recording date of the judgment lien. For those judgment liens recorded on or after September 1, 2007, the parties will need to comply with Texas Property Code Section 52.0012 (the effective date of the law is September 1, 2007). The statute requires the debtor to send a demand letter to the creditor and its attorney enclosing a copy of the “Homestead Affidavit as Release of Judgment Lien” (“Affidavit”) that is intended to be filed 30 days later. If the debtor does not receive a response, the statute provides that the filing of the Affidavit serves as a release of the judgment lien. If this option is to be utilized, guidance from underwriting counsel should be sought, as we will require strict compliance with the statute. For those judgment liens recorded prior to September 1, 2007, the law that was in effect prior to the statute governs (Tarrant Bank v. Miller). This method would include the debtor sending a demand letter to the creditor for a partial release of the judgment as to the debtor’s homestead. If there is no response, the debtor must initiate a lawsuit. (Note, a similar procedure is available for child support liens against the obligor’s homestead).

Florida– Yes, as long as certain procedures are followed. As provided in Florida Statute Section 222.01, the Seller (debtor) must record a Notice of Homestead with the Clerk of Court in the county where the Judgment is recorded.  The Clerk of Court will mail a copy of the Notice of Homestead to the Judgment Creditor.  The Judgment Creditor has forty-five days to contest the Homestead designation.  If the Creditor does not contest, the Judgment may then be avoided and the sale can take place without exception for the Judgment.  When the closing must take place prior to the expiration of the forty-five day contest period, the Agent may close and escrow the principal and any interest. Once the contest period expires, the escrowed funds may be released back to the Seller.    It is important to note, certain Judgments cannot be avoided by the Notice of Homestead procedures. Judgment for property taxes and judgments related to the real property itself such as Contractor’s Judgments cannot be avoided and must be paid regardless of Homestead designation.   Prior to relying on the Notice of Homestead provisions, please contact underwriting counsel for additional information.  

Arizona– Yes, in general, if it can be definitively established that the property was at all relevant times the homestead of the judgment debtor, then a requirement in the commitment to satisfy the judgment and/or obtain a release of the judgment lien may be removed. Arizona law provides that a recorded judgment “shall not become a lien upon any homestead property.” Since a 1994 amendment, there is no requirement to designate a protected property, unless demanded by a creditor. The exemption is available without reference to “equitable factors,” except where the judgment sought to be collected was based on damages incurred by the creditor in connection with a conveyance or wrongdoing involving the homestead property itself. Also, a person may claim homestead protection even when they hold property in a trust, if the trust is revocable. At a minimum, there should be a requirement to obtain and record a declaration designating the property as a homestead, and backup documentation, e.g. utility bills, should be requested and reviewed. For substantial judgments, guidance from underwriting counsel should be sought.

New Mexico– No. New Mexico allows for only a partial homestead exemption in the amount of $60,000.00 ($120,000.00 for married/joint owners). This exemption must be affirmatively claimed and may be challenged by the judgment creditor. Also, although bankruptcy may wipe out all or a portion of the debt, the lien still remains. Technically, a judgment creditor can still try to foreclose the lien which places a cloud on title. For those reasons, the custom is to require a release of the judgment lien in the title commitment.