Liens: What they are and How they Work
Liens give somebody an interest in somebody else’s property. Although you (hopefully) rarely notice them, they’re an important part of home loans, auto loans, and other parts of your life. When things get complicated, liens can make your life difficult – or help you protect your interests.
What is a Lien?
A lien is a legal claim against property. For example, somebody might say that you owe them money, and they make it official by filing a document with government offices.
By doing so, the lienholder (the person or organization that files the lien) secures the debt and improves their chances of getting paid.
How does a creditor benefit from placing a lien on something you own? Liens are public records, which tell other potential creditors that they won’t be first in line when it comes time to get repaid. The lien essentially puts up roadblocks around your property; it will be very difficult or impossible to sell the property until the lien is cleared up. For example, liens typically prevent you from selling (or refinancing) your home or auto unless you pay off outstanding debts in the process. The lienholder might even be able to take your property (see below).
Where can Liens Come From?
Liens are a possibility any time somebody has a legal right to somebody else’s property. They’re often part of an agreement (home and auto loans, for example), but they can also be the result of legal action.
Home loans: when you borrow to buy a home, the home serves as collateral. In other words, you agree (in the fine print) that the lender can foreclose on your home if you fail to meet certain requirements. For example, you need to make monthly payments, insure the property, possibly live in it as your primary residence for a few years, and so on.
Auto loans: auto loans are very similar to home loans. One difference might be that instead of forcing you out of your home (which doesn’t go anywhere), your vehicle might be taken from you anywhere – at home, work, or out-and-about – through repossession. Car title loans can also result in liens filed with your local Department of Motor Vehicles (DMV).
Mechanic’s liens (or construction liens): when work is done on your home, contractors expect to get paid. If you don’t pay (or if a contractor fails to pay subcontractors – even though that’s not the homeowner’s fault), workers can file a mechanic’s lien with the county recorder’s office.
Judgment liens: if a lawsuit is successfully brought against you, your creditor might have the right to file a lien. The lien ensures that damages will be paid if you don’t have the ability to pay out of pocket.
Tax liens: local governments and the IRS sometimes collect unpaid taxes with liens. Tax liens are bad news because they can be attached to current and future assets, creditors can more easily collect from bank accounts, and they might be able to jump to the front of the line; the IRS gets to collect before your lender, for example, and don’t count on unpaid taxes being discharged in bankruptcy.
Local governments in need of funding can be especially eager to collect, but the IRS seems to move slower.
Removing a Lien
If you own property with a lien against it, you’re stuck with that property until the lien is cleared up. Liens can generally only be removed by the person or organization that created them, but there are some exceptions. That means that if the lien is legitimate, you’ll need to pay any debts to get the lien released. This might be easier than you think – liens are routinely removed when you sell your home or your financed auto.
Try negotiating if you don’t have enough to pay off a debt. Creditors might be willing to accept less if it means they can put everything in the past.
If you believe a lien is not legitimate, contact the lienholder. In some cases, lien releases get lost or forgotten (for example, when you buy a used vehicle from somebody who previously had an auto loan).
Bringing the matter to the right person’s attention might be all that’s needed.
When there’s disagreement, things get much more difficult. You might need to bring legal action against the lienholder to have the lien released. It’s also a good idea to investigate whether or not any claims are still valid – many liens expire after a number of years.