If you have unpaid debts, your creditor could place a lien on your property. If the debt is not repaid, the lienholder may have the right to liquidate the property to recoup their loss, or they may be entitled to the proceeds if you sell the property.
Where Do Liens Come From?
Most liens are made by lenders to use as collateral for repayment of a debt. This means the entity that placed the lien has a legal claim to the property the lien is placed on.
Liens may be placed preemptively by lenders when a loan contract is signed to discourage borrowers from missing payments. A creditor can also file a lien after the borrower has failed to make payments toward the debt. In this case, the lien may be placed through the court system. Tax authorities can also place liens on someone’s property if they fail to pay their tax liability.
Types of Liens
Liens are divided into a few different types based on the circumstances that make the lien necessary and what type of organization is placing the lien. The four basic types of liens are judgment liens, mechanic’s liens, property liens and tax liens.
Four Types of Liens
Judgment Liens
- Involuntary
- Placed as part of a court judgment
Mechanic’s Liens
- Involuntary
- Placed by contractor for unpaid labor
Property Liens
- Voluntary
- Placed as part of a mortgage or auto loan
Tax Liens
- Involuntary
- Placed by tax authorities for unpaid tax liabilities
Judgment Liens
Judgment liens are placed by legal authorities as part of a court judgment. This might mean that a creditor takes a borrower to court for defaulting on a debt. If the ruling is in favor of the creditor, the court may put a lien on the borrower’s assets.
When a judgment lien is placed, your creditor now has the legal claim to whatever property the lien is on. If the property is sold while the lien is still active, the proceeds of the sale will go to the lienholders, not the owner of the property, to pay the outstanding debt that triggered the lien.
Mechanic’s Liens
A mechanic’s lien, also known as a construction lien, is placed by a contractor such as a mechanic or home builder. If a contractor who worked on a piece of property or provided materials is not paid in full, that contractor can enforce their claim for payment by placing a construction lien on the property.
When a lien is filed against your property, the lien holder can sell the property to pay for the labor, services or materials associated with the work performed. Construction liens can only be placed on the property that the lien holder worked on. These liens cannot be filed against the homeowner’s other assets.
Property Liens
A property lien is usually associated with a property purchased via a loan, such as a house or a car. Property liens are placed by the lender when the loan contract is signed to ensure that their investment will be returned. If payments are not made towards the mortgage or auto loan, the creditor has the right to seize the property to repay the debt.
In the case of a real estate lien, your mortgage lender reserves the right to foreclose on your home if you don’t make the monthly payments towards your mortgage. You may have additional liens placed against your property if you take out a second mortgage or a home equity line of credit (HELOC). In this case, the lienholders’ claims are given priority based on when each lien was filed.
If you purchased a car using credit, your car is the collateral for that loan. The lender you borrowed your auto loan from can repossess your vehicle if you fall behind on payments or violate other terms of the loan. Creditors are not required to obtain permission from the court to repossess your car, and in many states, they don’t even have to notify you before they repossess it.
Tax Liens
Tax liens are placed by a government tax authority when a citizen fails to pay their tax liability. These liens give the government legal claim to property including real estate, personal property and financial assets.
A tax lien is different from a tax levy, which is when the government seizes your property to pay the tax debt. The lien simply secures the government’s legal claim to initiate a levy, but it does not guarantee that they will seize the property. A levy can occur if the tax debt remains unpaid even after a lien has been placed.
Tax liens can be placed by the federal government’s tax authority, the Internal Revenue Service (IRS). State tax authorities can also place liens on taxpayer property if the tax liability has become due and moved to the collection process.
How Do Liens Work?
Liens generally work in one of two ways: they either serve to safeguard a lender’s investment or as a way for creditors to recoup a loss due to unpaid debts. A lien can be placed consensually or involuntarily.
If the lien is placed to protect a lender’s investment, it’s probably a consensual lien. This means that the borrower and creditor both agreed to the placement of the lien. An example of a consensual lien would be what happens when you purchase a home or car and get a mortgage or auto loan.
Involuntary liens are generally used when a borrower defaults on their debt. These liens may be placed when the creditor takes the defaulting borrower to court. The court may give the creditor the legal claim to the property if the debt remains unpaid. Tax liens are the other major type of involuntary lien.
If you don’t pay back the debt that caused the lien to be placed, you could lose the property the lien is on. This is true for both consensual and involuntary liens.
For example, you could have your vehicle repossessed if you fall behind on auto loan payments. A mechanic can hold onto your car until you pay for the repairs performed on it. If you don’t pay your mortgage, you could lose your home to foreclosure. Creditors can also force a foreclosure on a non-mortgage lien, though this is not common.
Sometimes, even foreclosure is not enough to cover the unpaid debts. When that happens, creditors can transfer a lien to another property the borrower owns.
Having a lien filed on your property is public record, but it will not show up on your credit report. The only public records that get reported to credit bureaus are bankruptcies. However, this doesn’t mean that having a lien on your property won’t negatively affect your credit score.
Though a real estate lien won’t be listed on your credit report, the mortgage related to the lien will be noted as one of your active credit accounts. If the lien was placed involuntarily, that probably means you weren’t paying off your debts as agreed. Making payments on time is the most important factor in calculating your credit score, so the missed payments that can trigger a lien will likely cause your score to drop.
Can You Get a Lien Removed?
In most cases, the only way to get a lien removed is to convince the lienholder to remove it. The most effective way to do this is to pay off the debt that caused the lien to be filed in the first place.
For example, if you’ve got a lien placed on your home by your mortgage lender, that lien will be removed if you pay off your mortgage completely or if you allow the home to be sold in foreclosure so that the proceeds go toward paying the outstanding debt.
If you are not able to pay off your debt in full, you may still be able to get the lien removed. You can try to negotiate a partial payment or make a payment plan with the lienholder in exchange for them releasing the lien on your property.
If you have reason to believe the lien is invalid, you can attempt to dispute the lien in court. You can ask for a court order to remove the lien if you can show evidence proving that the lien is not valid.
Do Loans Require Liens?
A lien can be part of the lending process for certain types of loans. Loans for purchasing physical property, including cars and houses, typically require a lien to be placed on the property that’s being purchased.
As mentioned above, these liens are considered voluntary or consensual liens, because the borrower understands that the lien is being placed on the property as soon as they sign the loan agreement.
Having a lien on your property is not necessarily a bad thing. If the lien is part of a loan agreement, you shouldn’t have any financial problems relating to the lien as long as you keep making payments toward the debt.
