What is a lien?
When most people think of liens, tax liens come to mind first. However, there are other types of liens you may have to deal with.
Property, child support, cars, and more can be subjected to a lien. At its most basic, a lien is a claim on something you own as a security against a debt you owe.
Here, we outline the basics of liens with a little help from Leslie Tayne, Head Attorney at Tayne Law Group and one of Debt.com’s experts.
Types of liens
There are three common types of liens: statutory, consensual, and judgment.
All statutory liens result from state and federal laws. They usually happen automatically and are considered involuntary liens.
Liens don’t have to hold you back. Find out how you can solve this financial problem.
You have a tax lien if you owe back taxes to the IRS and they place a lien against your property. This isn’t just a result of unpaid federal income taxes. You can also have a lien placed against you as a result of unpaid property or estate taxes.
This is a common lien that the government places against your property if you don’t pay your tax debt. We already wrote a couple pages on this, so check them out for more info:
If a contractor or mechanic works on property you own and you fail to pay them, they can place a mechanic’s lien on the property.
“Also called a construction lien, these occur when a contractor isn’t paid for the work they’ve done on a home,” adds Tayne. “The buyer may not be able to complete buying the home until the seller has fulfilled their obligations on this lien.”
If you’re the contractor in this situation, placing a lien can help you get paid. You could file a lien in certain situations and ensure that you get paid for your work as a general contractor or a mechanic.
Looking to buy a home? Home-buying liens could get in the way.
“If you’re buying a home, there may be a lien on the house that the seller must take care of before the house can be sold,” says Tayne. “Home-buying liens are generally a first mortgage that uses the home as collateral and lends the bank the first lien on the property. This means that the lien remains on the home until the loan is paid off. The homebuyer’s payment to buy the home typically fulfills the seller’s obligation to this loan.”
This type of lien could also affect you if you are the property owner looking to sell the property. In this situation, you are on the other end of the lien. But, as Leslie Tayne said, the new owner’s payment will usually fulfill your obligation to the loan and remove the lien.
As the name implies, consensual liens are voluntary. Both parties have to agree on them for consensual liens to take effect.
Purchase-Money Security Liens
This is fancy name for when a borrower uses credit from a lender to buy property. This property secures the credit. Types of purchase-money security liens include home mortgages, car loans, and other purchases of property involving a credit agreement.
Non-Purchase-Money Security Liens
This is the reverse of a purchase-money security lien. The lender already owns property, and they use it as security for borrowing. One example is a second mortgage or refinancing a mortgage.
Judgment liens come from lawsuits. Judges place this type of lien on a defendant’s property. It gives the judge the power to foreclose. “The lien occurs when the creditor wins the judgment in court in the form of a lien on the debtor’s property.,” Tayne says. “A judgment lien can prevent a seller from successfully transferring the property title to a new buyer.”
This is the worst type of lien to deal with, so avoid it at all costs.
What does a lien do to your credit? What about your property?
A piece of property can’t be transferred until the lien on it is satisfied. You may need to refinance or use other lines of credit to satisfy the lien. “Also,” Tayne notes, “It’s likely that the lien is listed on your credit report. If the lien was from a bad debt, one in which you haven’t paid, then that can negatively impact your credit score and, ultimately, your finances.”
How many points does a lien decrease your credit score? Well, the answer will be different for everyone. It depends on the lien and your current score. Also, tax liens no longer show up on credit reports at all. The bottom line for your credit is to avoid liens altogether. If you do have a lien, satisfy it as soon as you can.
Get rid of a lien
The simplest way to get rid of a lien is to pay off your debts. Prioritize paying what you owe in a timely manner to avoid the negative repercussions that come with liens. Tayne also highlights that, with mechanic’s liens, “both parties can sign a contract after payment has been made that prevents the contractor from putting a lien on the property.”
What else can you do to prevent a lien? Stick to your budget. When you know what you can and can’t afford, you’re less likely to get stuck with a lien in the first place.
Can you handle liens yourself, or only with professional help?
When dealing with a lien, the first thing you should do is verify its legitimacy. Once you know it’s legitimate, you can decide if professional help is right for you depending on the complexity of your lien.
“You may be able to resolve liens yourself, but it may be in your best interest to handle a professional to help with an attorney who can properly resolve the debt and lien for you to ensure it was done correctly and all of the necessary documents are filed with the court or county recorder’s office,” Tayne says. “Having professional legal help can assist you in navigating the process, which can sometimes be confusing. Professional help can also ensure that you’re following the procedure correctly in order to avoid making the situation worse.”