What Is a Lien?
How Does a Lien Work?
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
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
- 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 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
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.