What Is a Lien and What Should You Do About It?
When the average person hears the term “lien,” they probably think of a lien on a house that can slow down the sale of a home. Liens are fairly common in the world of real estate, but they can be granted in a wide range of transactions that involve borrowing money to make a purchase. Liens are also used by the government to recover unpaid taxes.
Needless to say, there is a lot of confusion surrounding a term that’s thrown around very frequently. Let’s clear the air about what a lien is, the implications of a lien, different types of liens, and what you can do to remove a lien against your property.
What Is a Lien?
A lien is a legal claim placed on a property that you own or use, whether it’s a home, vehicle, boat or even office equipment. This claim basically says that you owe money, and if you don’t pay what you owe or live up to other obligations in the contract, the creditor may be able to take possession of the property. Essentially, a lien almost guarantees that a creditor will collect the money owed to them, or at least a portion of that money, at some point.
For example, let’s say you want to finance a car. The bank providing the loan puts a lien on the car and holds the title. That means you can’t sell the car without the permission of the bank, which will require you to pay off the lien first.
If you make all the payments and pay off the car, the bank will release the title to you and release the lien. If you don’t make your payments. Then the bank can execute the lien and take possession of your car. The bank will typically sell the car to someone else to recover the money you owe, eliminating the original lien.
Types of Liens
A voluntary lien, or consensual lien, is created when a creditor and borrower agree that a property will serve as collateral as a condition of the loan. The most common voluntary lien is a mortgage. The lender technically owns the home until you pay it off and gain outright ownership.
An involuntary lien, or non-consensual lien, can be placed by law or obtained in court by a creditor, such as a mortgage lender, credit card company or healthcare provider. This can be done without filing a lawsuit in many cases. There are several types of involuntary liens.
- A tax lien is used by the government to recover unpaid taxes. For example, unpaid property taxes can lead to a lien from your local municipality, while unpaid income taxes can result in a lien from the IRS or the state. Not only can the government seize current and future assets and access bank accounts, but a tax lien will typically show up as a public record on your credit report. This can have a significant impact on your score.
- A mechanic’s or materialman’s lien can be filed against your property by a contractor (including subcontractors, architects, engineers, mechanics, suppliers, etc.) if you don’t pay your bill. There are a number of state-specific requirements that contractors must meet involving the filing of a claim and a lawsuit. If successful, the contractor could force the sale of your property.
- A child support lien can be placed on your property if you owe significant child support or alimony. The lien will stay in place until you pay what you owe or sell or refinance the property.
- A judgment lien can be filed by someone who wins a lawsuit against you if they can’t collect money immediately.
How to Remove a Lien Against Your Property
If the lien is legitimate, the first and most obvious way to get rid of it is to pay what you owe. If you have a lien on your home or car, liens are routinely removed when you sell your property. Another option is to see if your creditor is willing to negotiate a settlement. Some creditors would rather get something than nothing and move on.
If you feel the lien is not legitimate, contact the lienholder. In the case of an auto loan, for example, a lien release could be missed. Some liens also expire after a certain period of time. In these cases, it could be an oversight that needs to be brought to light. However, you might need to take legal action or obtain a court order if you have a dispute with a lienholder about the legitimacy of the lien.
If you receive a lien notice, we recommend contacting your attorney to review the lien. Make sure all procedures were followed and proper paperwork was filed before deciding how to respond. A lien doesn’t mean the lienholder is immediately trying to gain possession of your property, but the claim should be investigated right away. In other words, don’t panic. Just make sure you address the lien as soon as possible.