Lien Explained: See How Liens Work and What Types Exist
The concept of a lien is important to understand if you have ever been in debt to another party.
You may already be familiar with liens if you purchased your home with the assistance of a mortgage; this is because a lien will be placed on your property as security for the loan until it is paid in full.
Lien may sound like a lot of legalese, but it’s just a way for people to get paid back when they’re in debt to someone else. Let’s explore the significance of that in further depth.
What Is a Lien?
If you have a debt and need to secure your repayment, you can do so by securing a lien on your property. Liens can be placed on either real estate (like a house) or personal property (such as a car or a couch) depending on the nature of the debt.
Mortgages and tax liens, for instance, are secured by physical claims on the property in question. If the owner of some personal property, say a car, has yet to pay off the loan used to buy it, a lien may be placed on the item. In most cases, judgment liens can be attached to either the real or personal property of the debtor.
A lien grants the holder the legal right to take possession of your home in the event of default on the lien’s terms. Because of this, a title search is a standard component of the mortgage application process that lenders will need.
Any encumbrances on a property’s title can be found through a title search. If there are any outstanding liens on the property, the mortgage lender will not approve the loan.
Most likely, you will need to settle the obligation secured by a lien on your property before you can sell it.
How Do Liens Work?
While there are several distinct types of liens, all of them grant the holder of the lien a legal claim to the collateral.
Property is an illiquid asset, but lien holders still have the right to sell it if necessary to pay off the debt secured by the lien.
For example, a lien holder cannot just extract $10,000 in cash from your house’s construction materials if you owe them that much. However, if they decide to sell your home, they can keep $10,000 of the revenues.
The proceeds from the sale of a property subject to more than one lien are normally distributed equally among the lien holders. In most cases, the order in which liens are satisfied is determined by the order in which they were recorded, with the first lien holder being paid in full before any subsequent lien holders.
However, depending on the nature of the lien, such as a tax lien on the property, the recording date of the claim may not affect its priority.
Different Types of Liens
There are many various kinds of liens, but they all amount to a secured interest in the property. The owner of some properties may voluntarily grant liens on their property. Other liens are imposed by the government or a court and are not chosen by the debtor.
There are typically six different kinds of liens, and they are as follows:
- Mortgage Lien – Mortgages are by far the most typical lien. When a mortgage company makes a loan against real estate, it creates a lien on the borrower’s title to the property. The homeowner grants this lien voluntarily at the time of closing on their loan, signing it as part of a stack of other documents.
- Tax Lien – When a property’s owner ceases to settle their real estate taxes, a tax lien is placed on the property as a special lien. Unpaid tax liabilities, along with any accrued interest and penalties, may result in a government-mandated property sale.
- Mechanics Lien – A mechanic’s lien is filed by a contractor against a property if the owner fails to pay the contractor for services rendered. This type of lien is commonly referred to as a “materialman’s lien” since it can be issued by a vendor who supplied materials for a construction project.
- IRS Lien – If a property owner fails to pay federal income taxes, the government may file a lien against the property. When a taxpayer owes taxes to the government, the government may file a lien against all of that person’s property. Until such time as these liens are paid in full, the government can initiate foreclosure proceedings.
- Judgment Lien – A judgment lien is a claim against property that a court grants to the prevailing party in a lawsuit when the defendant in that case fails to pay the judgment.
A claimant may file a lien against your property and other assets if you lose a lawsuit and don’t pay the judgment. Without paying them, you won’t have any options for using the property as collateral for a loan or sale. The lienholder may seek foreclosure if you do not pay off the debt.
- Child Support Lien – If a parent fails to pay child support as directed by the court, a lien may be placed on the parent’s property to secure payment. These liens, like all judgment liens, require a court order for imposition.
What Does Having a Lien on a House Mean?
Any outstanding bills incurred by a homeowner might be secured by filing a lien against their property. If a lien is attached to the title of a home, the owner is unable to sell the property, refinance it, or transfer ownership in any other way.
A lien is a type of security interest placed on property to guarantee repayment of a debt; however, only specific types of debts can give rise to a lien. Outstanding mortgage loan balances and tax bills are only two examples of the many types of indebtedness that people face.
Credit reporting companies will keep track of any liens filed against your property, which can have a negative impact on your score and thus your ability to get future loans, both secured and unsecured. In order to maximize the sale price of the property, the owner should remove all liens as quickly as feasible.
Benefits and Risks of Liens
The debtor’s interest rate is lowered because of the lien. Your ability to provide collateral for the lender’s loss in the event of loan default will allow them to bill you a lower interest rate in exchange for a lesser loan amount.
Knowing the potential downsides of a loan agreement is essential before you commit to it, as is the case with any other significant financial decision.
Be sure you fully comprehend the collateral the lender intends to place a lien on before signing any documents. Having a lien placed on your property because of default could have serious consequences.
As with any financial obligation, it’s vital to calculate the potential costs and benefits before making a decision to default on the loan.
How to Remove Liens
If a lien has been filed against the property you own, you might be unable to sell it until the underlying problems have been resolved. There are a few exceptions to the rule that only the party that filed the lien can remove it.
- Repay the Debt – In order to get a lien removed, you may have to pay off your debts if they are legal. Liens are typically dismissed when a home or financed vehicle is sold, so getting started may be less of a hassle than you think.
- Settle – If you don’t have the money to pay off your debt, try bargaining for more time. It’s possible your creditors would settle for less than they’re owed in order to get their hands on some sort of immediate compensation and close the loan account.
- Do the Right Thing and Fix It – Don’t hesitate to get in touch with the lien holder if you have any doubts about the validity of a lien. Lien releases are sometimes misplaced or forgotten.
One possible scenario involves purchasing a secondhand car from a person who had an auto loan but failed to obtain a lien release before selling. It could be as simple as bringing the issue to the correct person’s attention.
- Contest it – Disagreement makes everything more challenging. Depending on the circumstances, you may need to sue the lienholder in order to get the lien removed. It is also wise to verify the continued validity of any claims; some liens become null and void after a certain amount of time has passed.
Bottom Line
To ensure repayment or to recoup the debt, a lien may be placed on a portion of the debtor’s assets equivalent to the amount still owed on the loan.
Liens are legal claims often filed in connection with debts secured by real property or personal property with significant market value. When they go through, sales of assets seized through foreclosure or seizure are often conducted at a steep discount to the current market value.
If it appears that you will be unable to keep up with the installments on a loan, the best course of action may be for you to liquidate the asset on your own. This is your best opportunity to at least retain some of the funds that are involved in the transaction.
