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Banking Basics

What Is a Lien and How Do They Work?

Liens allow creditors and other entities the right to seize and sell your personal property and assets. Learn how liens work and what you can do if you’re ever hit with one.

Katana Dumont • May 9, 2022

At some point in our adult lives, we’ll find ourselves in need of financing for a big-ticket item, like a car or house. When we borrow money from a lender, it goes without saying that we’ll need to eventually pay that money back (and with interest). But sometimes life gets in the way of our financial obligations, and we may face the possibility of defaulting on our loans. In addition to harming your credit score and becoming a red flag to potential lenders, unpaid debts can result in a lien being placed on your property or assets. 

If you have unpaid debts or are struggling to make payments, you’ll want to know what liens are and how they work. 

In This Article

  1. What Are Liens?
  2. How Do Liens Work?
  3. Types of Liens
  4. How to Find Out if There’s a Lien on Your Property
  5. How to Remove a Lien From Your Property
  6. FAQs
  7. Final Thoughts

What Are Liens?

Liens are legal rights or claims to an asset that creditors use as collateral for an unpaid debt. Liens are a safety net that lenders can fall back on in the circumstance that a borrower can’t satisfy their debts and obligations. In the case of unresolved debt, a creditor or a legal judgment can establish a lien, giving creditors the ability to seize the asset in question. Liens are typically a matter of public record and tell potential lenders that you have unresolved debts and existing claims on your property.  

How Do Liens Work?

After a lien is placed on a borrower’s property or asset, creditors are given the legal right to seize and sell the collateral asset as the lienholder. A lienholder is a person or organization that files the lien. Liens can be both voluntary, in which a borrower agrees to put their asset as collateral, or involuntary. Involuntary or statutory liens mean a creditor seeks legal action for unresolved debts.

To illustrate how a lien works, let’s say a consumer borrows money from a bank to help pay for a new car. The seller of the car is given money from the bank, and in turn, the bank is granted a lien on the collateral property, which in this case would be the car. If the borrower doesn’t repay the car loan, the bank has the legal right to carry out the lien. This means the bank can seize the vehicle and sell it to repay the loan.

Types of Liens

There are many types of liens that are used to secure property and assets. Let’s take a look at some of the most common lien types. 

Mortgage Lien

A mortgage lien is taken by a mortgage lender when a borrower takes out a loan to buy a house. A mortgage lien is voluntary and is one of the many documents homeowners sign when closing on a house. As long as you make consistent payments toward your mortgage and eventually pay it off, the lien will be resolved. However, if you fall behind on payments and refinancing isn’t an option, then you might end up in foreclosure. In that case, the mortgage lien gives legal permission to the lender to sell your home and use the money from the sale to cover what you owe.

Judgment Lien

A judgment lien is a type of involuntary lien that’s granted by a judge, usually due to a lawsuit. When a borrower fails to meet the financial obligations set by a loan, the creditor can sue the borrower in court for any outstanding balance that remains. When the court rules in favor of the creditor, the creditor is given the right to take possession of a property — which can include things like real estate, vehicles, a business, or any other type of asset that satisfies the court judgment.

Tax Liens

A tax lien is a government-enacted lien that allows tax authorities to seize the property or assets of a delinquent taxpayer. Unpaid taxes, such as income taxes or property taxes, can result in the Internal Revenue Service (IRS) placing a legal claim on a taxpayer’s property. If tax liens go unpaid for an extended period of time, the IRS can order a sale of the property in order to retrieve the money due from the unpaid taxes. A tax lien can also affect the taxpayer’s ability to sell existing assets and build credit

Mechanic’s Lien

A mechanic’s lien is a type of lien placed on a property owner when they fail to pay a contractor or builder for services or materials they used to make repairs on a home. If a homeowner doesn’t pay the worker or doesn’t abide by the regulations set in the contract agreement, the contractor can go to court and get a judgment against the owner. In this case, property or assets can be auctioned off to pay the lienholder (which in this case would be the contractor). 

How to Find Out if There’s a Lien on Your Property

Finding out if there is a lien on your property should be a fairly easy process, as liens are a matter of public record. The majority of states allow you to search by address with the county recorder, clerk, or assessor’s office online. The search for liens is free, though you may have to pay a small fee for a copy of the report. Alternatively, you can appear directly at the county’s office or hire a title company to do the search for you, though this service will cost a fee. Another easy way to search for liens is through PropertyShark. The site has a portal where you can type in a property’s address to find any liens on it.

How to Remove a Lien From Your Property

You have some options when it comes to getting a lien removed from your property. The most straightforward way is to pay off your debts in full, which would trigger a lien release from the lienholder, giving up claim of your property. Of course, in theory, this is the best option, but if you’re struggling to pay back the lienholder, you can also do the following:

  • Negotiate the lien: After reviewing the terms of the lien, you can try to negotiate a payment plan with the lienholder. The type of payment terms you and your lienholder agree upon will depend on several factors, such as the type of lien, the value of the lien, and the relationship you have with the creditor. You may not be able to negotiate a better payment deal, but it doesn’t hurt to try.
  • Oppose the lien: If you feel the lien is invalid, you should first bring it up to the lienholder so they can be made aware of any mistakes on their end. If the lienholder disagrees with your claim, but you still feel the lien is invalid, then you can dispute it in court and ask that it be removed. You’ll need to present valid evidence to back up your claims in order to get the lien resolved.

FAQs

How do I get a lien off my house?

To remove a lien from your house or other property, you’ll need to pay off your loan in full. You may also be able to negotiate or dispute the lien with the lienholder or court.

Who can put a lien on a property?

A variety of entities have the legal right to put a lien on your property. The most common usually consists of the court, creditors, and contractors, but this will ultimately depend on the type of lien in question. 

Does a lien affect your credit?

Liens aren’t included in your credit reports, so they themselves can’t harm your credit. That being said, if the creditor that filed the lien reports payment information to the major credit bureaus, a record of nonpayment could be listed in your reports and negatively impact your scores.

Can my home have a lien from a previous owner?

In some cases, liens can be transferred to a new homebuyer. For example, if the property was purchased through a foreclosure or auction, then the liens on the property become the new buyer’s responsibility. But, in general, people don’t normally buy homes with existing liens, as it would be difficult to find a lender that would finance the home with a lien on it.

Can you sell a house with a lien on it?

It’s possible to sell a house with a lien on it, but it isn’t common to do so. Since the lienholder has legal rights over the property, they would need to give their consent before an owner could sell it.

Final Thoughts

Bottom line? The best way to steer clear of liens is to pay your debts on time and in full on a regular basis. If you start to fall behind, contact your creditor and see if the two of you can work out some kind of payment plan to ease the burden before it results in a lien on your property. Start working on your money management skills and financial habits now to better prepare you for borrowing money in the future. 

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