The judgment creditor is entitled to satisfy its judgment any way it can, legally, and that includes a general judgment lien (probably what they recorded that is affecting title), wage garnishment, etc.
Here, I think the lien on your house is a general judgment lien that the creditor recorded, and is being picked up by the title company. If that is the case they may not release that lien, because it's really against your name, not the specific property, and if they let it go, then they could miss the boat on anything else in the way of real estate you may own. So as the other answerer said, you can try to convince them you have no equity, but that may not result in their releasing this kind of lien even w/ the garnishment in place.
As to closing, YES, it will hold up a short sale if the contract's already been approved by the lender for closing, since they are expecting a minimum level dollar amount, and this is something that will prevent clearance of title. If the amount is relatively insignificant they may be willing to compromise a part of it if the sale is "close" to the mortgage balance, but again they don't have to, and if they foreclosed this general lien would fall off. You may hear the term "TI" thrown at you, which is a title indemnity fund, but that would require posting the whole balance due plus some, up to 150%, and if you had the $ presumably you'd pay this off.
You really need to consider an attorney to middle this for you......
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It is possible for the creditor with a lien to stop a short sale if the Lender (bank) requires a warranty deed as part of the sale. You may have to negotiate a deal with the creditor to get a release of the lien prior to the sale. If you can negotiate a quit claim deed with the lender then the lender takes the property "as is" inclusive of the liens.
Use the wage garnishment as an argument that the creditor is receiving his money that way and that there is no equity in the property.
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