Key takeaways
- A lien serves as an official notice that you owe a creditor for unpaid property. If you do not pay, the creditor can legally sell that property.
- A lien can be either voluntary, such as when buying a house, or involuntary, such as when defaulting on a car loan.
- Types of liens include judgment liens, tax liens, mechanic’s liens and HOA or condo liens.
- Involuntary liens can complicate the sale of property or refinancing loans.
A property lien is a legal tool that creditors use to secure the payment of debts. Whether you’re dealing with a mortgage lender, the government or a contractor, a lien grants these creditors a claim on your property if you fail to meet your financial obligations.
Understanding the nature of liens, how they work and their implications is crucial for anyone who borrows to buy property. If unresolved, a lien can lead to legal actions such as foreclosure or make it nearly impossible to borrow against or sell your property.
There are ways to resolve liens and clear your financial standing. Knowing how to navigate this process can protect your home equity and maintain your financial freedom.
What is a lien?
A lien is a legal claim made by a lender or creditor against an asset — such as a home or vehicle — when a borrower owes money. It grants the creditor the right to sell the property to recover the unpaid debt.
Liens can either be voluntary or involuntary. A voluntary lien occurs when you take out a mortgage to buy a house, while an involuntary lien is imposed by a third part. For instance, the government can impose a lien on your home if you fail to pay property or income taxes.
Liens can significantly affect your credit score, hinder property sales and even lead to foreclosure if left unresolved. While voluntary liens are part of most standard loans, involuntary liens can pose greater challenges, particularly when they occur without the property owner’s consent.
The impact of involuntary liens
When you fail to make payments on property such as a car or house, a creditor can place a lien on the asset, which grants them the legal right to sell that property to recover their debt.
With involuntary or statutory liens, creditors can take legal action against you to secure payment, sometimes without your consent. This type of lien can be applied to various assets beyond real estate, including vehicles and business assets.
An involuntary lien becomes part of the public record, so it can affect your creditworthiness and deter potential buyers if you decide to sell the property. Most buyers will avoid purchasing a property with an unresolved lien because it must be cleared before a sale can be finalized, adding uncertainty and extra time to the closing process.
This is particularly true for tax liens, where the government has significant power to enforce payment, sometimes even seizing the property. Promptly dealing with these liens is essential to prevent more severe consequences such as foreclosure or legal proceedings.
Types of liens
Liens come in a variety of forms. Here are some of the most common types of liens that may be placed on your property.
Judgment liens
A judgment lien arises after a court ruling in favor of a creditor, usually following unpaid debts. The court gives the creditor the right to claim the debtor’s property to satisfy the judgment.
Tax liens
The government places a tax lien on a property when the owner fails to pay taxes, whether income or property tax. Unlike other liens, tax liens can result in the government seizing the property if the owner doesn’t pay.
Mechanic’s liens
Mechanic’s liens protect contractors, builders and suppliers who work on a property. If they aren’t paid for their services, they can place a lien on the property until payment is made.
HOA or condo liens
If a homeowner fails to pay homeowner association (HOA) or condominium fees, the HOA can place a lien on their property. These liens can prevent homeowners from selling their property until the debt is settled.
Voluntary liens
A voluntary lien is one that both parties agree on. For example, when you get a mortgage to buy a home or use an auto loan to buy a car, you agree that the lender has a lien on your home or car.
How creditors collect on a lien
When a property owner fails to pay a debt, creditors can enforce their lien rights by foreclosing on or selling the asset. However, foreclosure is often a last resort for creditors because it involves legal costs, delays and complications.
In many cases, creditors would rather wait until the property is voluntarily sold, at which point they can claim their share of the proceeds at closing without having to manage or maintain the property.
For example, if a utility company files a lien for unpaid bills, forcing a foreclosure would require it to assume financial responsibility for ongoing mortgage payments until the property is sold. This added burden typically makes foreclosure an unattractive option.
However, there are exceptions to this approach. The IRS can be far more aggressive in collecting unpaid taxes. If a taxpayer fails to resolve a debt for too long, the IRS may seize assets, including homes, without waiting to sell the property.
In these cases, the IRS can sell the asset to recoup unpaid taxes, making it one of the more powerful lienholders. Other government liens, such as those for unpaid property taxes, can also lead to asset seizure more quickly than private liens.
What happens to your home equity if there is a lien on your home?
While having a voluntary lien on your home for your mortgage won’t impact your ability to apply for other loans, an involuntary lien on your property may. An involuntary lien on your home can restrict what you can do with your home and the equity you’ve built in it.
One of the first things lenders look for when you apply for something like a home equity loan or line of credit is active liens against your home. These liens can take precedence over their claim to your home, putting them at much higher risk if you default. That makes it difficult to borrow against your home equity or to refinance.
Involuntary liens also complicate selling your property because lenders won’t give a mortgage to someone who wants to buy a home with a lien against it. However, as long as you have kept up with payments on your mortgage. It’s normal and simple to sell your home with a voluntary lien from your mortgage lender.
How to remove a lien from your property
To remove a lien, the most straightforward approach is to pay off the debt in full. After the debt is settled, the lienholder should notify local authorities to release the lien.
However, if paying the full debt isn’t feasible, some options include:
- Negotiating with the lienholder for a payment plan or reduced settlement
- Borrowing money to pay off the lien — although this can be challenging if the lien has hurt your credit
Sometimes a lien placed on your property may be invalid. If this is the case, consult your state laws to determine the legal process for disputing a lien. You must often send a demand letter to the person filing the lien listing why it is invalid and ask them to remove it. If they refuse to remove the lien, it may be time to file a lawsuit.
Property owners who believe a lien is invalid can seek a court order to remove the lien. A judge can issue a court order if the homeowner has proof that the lien is unlawful or that they paid back all the money owed.
In some states, liens are valid for a specific time unless the lienholder applies for an extension. This time varies by state and type of lien, but it often ranges anywhere from 90 days to 10 years. If the lienholder waits too long, the lien may expire, leaving the lienholder unable to collect the money.
The bottom line
Most property owners deal with voluntary liens, as with mortgages or auto loans. However, involuntary liens can present a more significant problem because they restrict what you can do with your property and its equity.
If left unresolved, an involuntary lien can lead to foreclosure or significantly complicate the sale of property or refinancing of your home. Address liens as soon as possible to avoid long-term financial consequences.
If you have an involuntary lien on your property, consult a financial advisor or attorney to explore your options. Whether you’re looking to pay off the debt, dispute the lien or refinance your property, understanding your legal rights and responsibilities is crucial.
Frequently asked questions
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