What Is a Lien?

A lien is a financial claim that a person or company has on a property. Liens are generally placed on real property, such as homes and buildings, but they can also be placed on other forms of property, such as cars, investments, and business equipment. 

How Does a Lien Work?

The word “lien” comes from the latin word ligāre, which means “to bind” — so a lien binds a debtor to the property. Like a boat anchor, liens are financial anchors that hold a property back until released. They limit what can be done with a property, including selling it. In fact, liens give the creditors legal rights, which can include foreclosing on the property and selling it to satisfy the lien.
Getting a lien requires making a court filing in the county where the property is located. Different localities and states have different laws and procedures around filing liens. 

Types of Liens 

Liens can either be consensual or non-consensual (also known as statutory). 

Consensual liens are ones you agree to — like when your home or car serves as collateral for a mortgage or auto loan. For example, a mortgage lien remains on your home until the debt is paid. Non-consensual or involuntary liens, meanwhile, are put on a property because of outstanding debt. There are four key types of non-consensual liens:

  • Mechanic’s liens, which are generally levied by a contractor or subcontractor for unpaid work on a home or property. In order to put a lien on the property, the contractor or subcontractor needs to go to court to get a judgement.
  • Tax liens are a statutory lien for unpaid taxes placed by the taxing authority: either a federal, state or local government. These liens must be paid before mortgages. An Internal Revenue Service (IRS) tax lien attaches to all current and future assets, including personal property, motor vehicles, and investments. Federal tax liens in the United States will rarely be a surprise: The IRS will send a notice of tax due and demand payment before placing a lien. 
  • Judgment liens can be awarded by judges if someone files a lawsuit for money owed and wins. Filing a lien on the property as part of the judgement might be the only way to collect the money due. Judgement liens are common with small claims court cases.
  • Attorney’s liens ensure payment for legal bills. This type of lien, often used in personal injury cases, ensures the attorney is paid necessary legal fees out of the client’s award. 

Lien vs. Encumbrance

An encumbrance is, broadly, a third-party claim against your property. A lien is an encumbrance, but not all encumbrances are liens — liens are the only financial-related encumbrance. They're also the most common encumbrance. Other encumbrances include deed restrictions, easements, and encroachments, which can place restrictions on how an asset can be used or limit the transfer of the property:

  • Deed restrictions limit the use of a property, such as limiting changes to a historical elements of a home 
  • Easements give a third party a legal right to use the land — utility companies, for example, generally have easements to assess equipment and construct power lines
  • Encroachments are when another property owner’s structure intrudes on your land. 

Drawbacks of Liens

Liens limit your real estate plans: Most lenders won’t finance a property with a lien against it. That means you may not be able to buy a home with a lien or other encroachment, because lenders run title searches as part of the homebuying process. 

Liens can also make it difficult to sell a property, because a lien essentially means that someone else has a legal claim to the property. Lien holders have the legal right to seize and sell the property. 

In the worst case, the property could be seized and a forced sale enacted, which may be for less than fair market value. This is especially true with property taxes, although foreclosure and forced sales aren’t that common. Liens may also show up on credit reports, although tax liens are no longer reported by the three major credit reporting agencies.

How to Get a Lien Lifted

The easiest way to get a lien lifted is by payment of a debt. Alternatively, the lien holder and property owner can agree to a repayment plan on the condition that the lien holder remove the lien. 

Although liens are secured loans, some can be discharged in bankruptcy

Selling or foreclosing on the property can also satisfy a lien — the sale proceeds will be used to pay the debtholder. However, this can hurt the property owner’s credit rating if the lean was non-consensual. If the owner sells the property, they must pay off the liens. For example, a financed car will have a lien attached to the title. In order for the individual to sell or trade-in the car, the remaining debt must first be paid to the lender.

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