Learn more about how liens work, the protection they provide for lenders, and the different types.
What Is a Lien?
A lien is a legal right against a property that allows a lienholder to take control of it or take legal action to settle any debt. Liens act as collateral in situations where a person can’t honor their debt obligations and typically last until the debt is satisfied.
How a Lien Works
Take the case of a lien on a car you buy for your business. You buy the car from a dealer, secured by a bank loan, and the bank would then put a lien on it and hold the title. The bank has a security interest in the property, so the ownership of the car stays with them, and if the borrower defaults, they can sell the car to recover the amount of the loan. There are three possible outcomes to a loan that includes a lien:
You make all the payments and pay off the debt, removing the lien.You stop making payments, and the lienholder continues to hold the title until the property is subsequently sold to and paid for by someone else.You pay off the remaining debt to release the lien and have the ability to sell the property.
Liens against assets must be paid off when the individual using the asset sells it; they can’t receive payment for the sale until this happens. In the car example, the lender won’t release the title until the lien is paid off in full. You have to use the property while it’s being paid off in most cases.
Types of Liens
Consensual liens are those you agree or consent to when you purchase something through financing. Taking a lien on a car loan, with the car as collateral, is an example. Statutory or non-consensual liens are obtained through a court order to put a claim on an asset for unpaid debt. Statutory liens include:
Tax liensMechanic’s liensAttorney’s liensJudgment liens
With a tax lien, a lien is placed against someone’s property by a federal, state, or local government for non-payment of taxes—giving the government a security interest in the property—and it must be paid before the mortgage. The tax lien attaches to all of the debtor’s assets, such as property, securities, and vehicles, and includes the right to accounts receivable (payments from customers). It also attaches to future assets you acquired during the duration of the lien. A contractor or subcontractor most often brings a mechanic’s lien. If a contractor does work for a homeowner who refuses to pay, the contractor must go to court to get a judgment against the homeowner for the money. The judgment can be used to place a lien on the home. An attorney can get a lien to hold a client’s property until they pay for legal services. This type of lien is common in personal injury cases to ensure the attorney’s payment is taken out of the client’s award. A court awards judgment liens as a result of a lawsuit; if you win the lawsuit, a judgment may be the only way to get your money. This type of lien is common in small claims court cases.
Liens in Bankruptcy
Liens also figure in bankruptcy proceedings because they involve secured loans and repayment of debt. They can be discharged in bankruptcy, releasing the debtor from liability for the debt. Some liens, however, remain after the bankruptcy, as is the case with tax liens. The timing of the discharge depends on the type of bankruptcy.
How to Get Rid of a Lien
Paying the amount you owe, in full, is the best way to get rid of a lien. A “release of lien” is a written statement that removes the property from the lien’s threat. This is usually in the case of a mechanic’s lien or a tax lien. It should be signed at payment as proof of payment and assurance that the property will not have a judgment placed against it.
