The word "lien" may conjure images of debt collectors knocking down your door, but liens aren't necessarily a bad thing. In fact, many consumers may have several liens without even realizing it, especially if they're a homeowner or they took out a loan to buy a car.
So, what is a lien anyway? And, how do liens work? This guide will provide an overview of how liens work in the real world, the types of liens you can find and how you can get rid of liens over time.
Key takeaways
- A lien is a legal claim lenders use against property they finance. However, some liens are put in place when someone fails to pay a debt.
- Common types of liens include property liens, tax liens, judgment liens and mechanic's liens.
- Where some liens are voluntary (e.g., mortgage liens and liens that result from car loans), others are involuntary.
- Liens aren't inherently bad, and they can actually work in your favor in some circ*mstances.
What is a lien?
The word "lien" is used to describe a legal claim made against property that comes into play when a consumer takes out a loan or needs to repay a debt. While different types of liens work in their own way, they essentially allow a lender or another institution to sell the property to repay the debt they are owed.
As you learn more about liens, you should also know the difference between a lien and a levy. Generally speaking, a lien is a legal claim against your property, whereas a levy is the action used to seize the property in order to repay a debt.
How does a lien work?
The way liens work can depend on the type of lien in question. For example, consumers can expect a lien against their property when they take out a mortgage to purchase a home or a car loan to finance a car. In either scenario, the lender places a lien on their collateral (e.g., the home or the car) that will only be satisfied when the loan is paid in full.
Other liens come into play when a consumer does not repay debts they owe. For example, failing to pay your federal tax bill can result in the Internal Revenue Service (IRS) putting a lien on personal property you own. You may also wind up with a lien against your assets if you fail to keep up with other legal responsibilities, such as child support payments or property taxes.
What are the different types of liens?
That brings us to the main types of liens out there today. Here's an overview of the major liens you might come across and how each one works.
Child support liens
Parents who owe child support payments should expect a lien against their property if they fail to keep up with this obligation. This type of lien can be placed on real property, including real estate, land, property or anything attached to a piece of land. Child support liens can also be attached to personal property such as home appliances, artwork, jewelry or other valuables.
IRS liens
The Internal Revenue Service (IRS) will place a lien on your property if you fail to pay your federal tax debts. This type of lien can be applied to real estate you own, your personal property and/or your financial assets.
Judgment liens
A judgment lien is placed on your property by a court after a lawsuit, but only if the lawsuit is successful. This type of lien typically comes into play when a consumer owes money to a creditor and fails to repay. Common instances that lead into judgment liens include failure to repay credit card debt or medical bills.
Mechanic's liens
A mechanic's lien is used by contractors who perform work but do not get paid. If you hire a company or contractor to remodel your kitchen and you fail to pay your bill, for example, a mechanic's lien could be filed against your home for the amount you owe. While this does not mean you would be forced to pay the remaining bill right away, it would mean you could not sell or refinance your home without satisfying the lien.
Property tax liens
While each state has its own set of rules when it comes to handling unpaid property taxes, many states place liens against real property for unpaid property taxes. This type of lien makes it possible for the government to seize and sell your property to repay the debt.
How to remove a lien
The steps required to remove a lien depend on the type of lien in question. However, there are a few different strategies you can use to remove a lien from your real or personal property:
- Repay your debt. Paying the debt you owe (plus late fees, additional interest and other charges) is often the best and fastest way to have a lien removed. Not only can paying off unpaid debt lead to the removal of a lien, but it can prevent further legal consequences from coming into play.
- Negotiate the lien. There may also be scenarios where you can negotiate with the lender to pay back only part of the amount you owe. This negotiation could get the lien removed along the way, and your settlement could be paid in a lump sum or through regular payments over time.
- Dispute the lien. If you don't believe you owe the amount requested in the lien, you'll want to take steps to dispute it. This step must be taken through the courts, and you'll need to provide proof that the lien is invalid.
While the ways to remove a lien outlined above apply in many circ*mstances, most voluntary liens can be removed just by making enough payments toward the property you financed. If you took out a car loan to finance a vehicle, for example, making the final payment on your loan will ultimately result in the lien being lifted. The same is true if you take out a mortgage to purchase a home. Once the final mortgage payment is made, the lien on your property will be removed as a result.
Loan lien requirements
Where some types of loans use certain property as collateral and place a lien against it automatically, others do not. Generally speaking, loans that use a lien do so because of the presence of physical collateral. These loans are commonly referred to as secured loans.
Types of loans that require a lien against your property include:
- Auto loans
- Certain business loans
- Conventional mortgages
- Home equity lines of credit
- Home equity loans
- FHA loans
- USDA loans
- VA loans
Some types of debts cannot use a lien because of the lack of physical collateral tied to the debt. These loans are often referred to as unsecured loans.
Examples of loans that do not require a lien include the following:
- Credit cards
- Medical debt
- Personal loans
- Student loans
- Unsecured lines of credit
Pay your bills to avoid liens
In summary, liens can be a valuable tool or a huge burden. It all depends on whether the lien was placed on your property at your request, or if you got stuck with a lien on your property because you failed to repay a debt.
If you want to use liens to your advantage while avoiding legal and financial consequences of involuntary liens, your best bet is always paying your bills and amounts owed on time, whether to the government, a lender or another third party.
Frequently asked questions (FAQs)
Will a lien hurt my credit score?
While liens aren't reported to the credit bureaus, involuntary liens put in place because you did not repay a debt will negatively impact your credit. After all, your late payments or non-payment will be reported before the lien is put in place.
How long does a lien stay on your credit?
As of 2018, tax liens are no longer a part of credit reports. Other liens are not even listed on credit reports, but negative information on credit reports due to late payments on non-payments can stay reported for seven years from the original delinquency date.
Who can put a lien on a property?
Liens can be put into place by a range of third parties, including the IRS, mortgage companies, auto loan companies, contractors and local or state governments.
This story was written by NJ Personal Finance, a partner of NJ.com. The information presented here is created independently from the NJ.com editorial staff, and purchases made through links in this article may result in NJ.com earning a commission.
