Liens: What They Are and How They Work
Liens give somebody a right to somebody else’s property. You rarely notice them when things are going well because they help with home loans, auto loans, and other parts of your life. But when things go badly, liens can make your life difficult—or help you protect your interests.
What Is a Lien?
A lien is a legal claim or a right against property. Liens provide security, allowing a person or organization to take property or take other legal action to satisfy debts and obligations. Liens are often part of the public record, informing potential creditors and others about existing debts.
Here's an example: When you buy a home, you promise to repay your lender. But your lender might want more than your signature—they have very little leverage if you stop making payments. But by filing specific documents with local government offices, the lender becomes a lienholder (the person or organization that files the lien) on your property. The debt is now secured, and the lender has a better chance of getting repaid.
How does a creditor benefit from placing a claim on something you own?
- Liens may give creditors the legal right to take your property and sell it if you don’t repay your debt.
- As public records, liens tell other potential creditors that there are existing claims to the property. New lenders won’t be first in line when it comes time to get repaid. As a result, it will be 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.
Where Do Liens Come From?
Liens are possible anytime somebody has a legal right to somebody else’s property. They’re typically part of an agreement to purchase real or personal property (home and auto loans, for example). Liens can also exist as a result of legal action.
When you borrow to buy a home, the property serves as collateral. In your loan agreement, you agree to allow the lender to 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 several years, and more.
Auto loans are similar to home loans. One difference is that instead of forcing you out of your home (which doesn’t go anywhere), your auto lender can take your vehicle from you through repossession. You won’t necessarily know when or where this happens ahead of time—it can happen while you’re at home, at work, or while you’re out-and-about. Car title loans can also result in liens filed with your local Department of Motor Vehicles (DMV).
Mechanic’s Liens (or Construction Liens)
When contractors work on your property, they expect to get paid. If you don’t pay (or if a contractor fails to pay subcontractors—even though that’s not your fault), workers can file a mechanic’s lien with the county recorder’s office.
If somebody wins a lawsuit against you, they may become a creditor. If they can’t collect immediately, they might have the right to file a lien against property you own. The lien ensures that damages will eventually be paid when you can’t pay out of pocket.
Local governments and the IRS sometimes collect unpaid taxes with liens. Tax liens are particularly troublesome—taxing authorities can attach liens to current and future assets, they can collect from bank accounts relatively easily, and they might even be able to jump to the front of the line and collect before other creditors. The IRS generally gets to collect before your lender, for example, and bankruptcy might not be sufficient to discharge unpaid taxes. Local governments in need of funding can be especially eager to collect, but the IRS sometimes moves slower.
How to Remove a Lien
If you own property with a lien against it, you may be stuck with that property until you clear up any issues causing the lien. Liens can generally only be removed by the person or organization that created them, but there are several exceptions.
Pay It Off
Ultimately, if a lien is legitimate, you may need to pay debts to get the lien released. The process 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 than you owe if they can get something now and put the loan behind them.
Get It Corrected
If you believe a lien is not legitimate, contact the lienholder. In some cases, lien releases get lost or forgotten. For example, you might buy a used vehicle from somebody who previously had an auto loan, and the lien release fell through the cracks. Bringing the matter to the right person’s attention might be all that’s needed.
When there’s any disagreement, things get much more difficult. You might need to bring legal action against a lienholder to have the lien released. It’s also a good idea to investigate whether or not any claims are still valid—some liens expire after a number of years.
IRS. "What's the Difference Between a Levy and a Lien?" Accessed Dec. 10, 2019.
Cornell Law School Legal Information Institute. "Lien." Accessed Dec. 10, 2019.
Cornell Law School Legal Information Institute. "Debtor and Creditor." Accessed Dec. 10, 2019.
First Savings Mortgage. "Difference Between a Lien and a Mortgage." Accessed Dec. 10, 2019.
National Consumer Law Center Digital Library. "Motor Vehicle Repossessions: Consumer Debt Advice from NCLC." Accessed Dec. 10, 2019.
Cornell Law School Legal Information Institute. "Mechanic's Lien." Accessed Dec. 10, 2019.
Consumer Financial Protection Bureau (CFPB). "What Is a Judgement?" Accessed Dec. 10, 2019.
IRS. "Understanding a Federal Tax Lien." Accessed Dec. 10, 2019.
Consumer Financial Protection Bureau. "What Is the Best Way to Negotiate a Settlement With a Debt Collector?" Accessed Dec. 10, 2019.