Liens: What are they and how do they work?

To many people, the word “lien” suggests financial trouble, but that is not always the case. Whether they realize it or not, over 60% of homeowners United States have a lien on their property. Over 80% of new car buyers have liens on their cars. Liens come in many forms and have important implications for property owners.

Quick Guide: What is a Lien? | Types of Liens | How do Liens work?

What is a Lien?

A lien is a legal claim on an asset, like a house or a car, to secure a debt. A creditor may get a lien placed on a debtor’s property to help ensure that they are paid back. A lien allows the creditor to take the property if the debtor doesn’t repay their debt.

Lien vs. Mortgage

In most states, mortgages are considered a type of lien. Mortgages are associated with loans, while liens can result from loans or with other events. Mortgages are specific to real estate, while liens can be on real estate or other property.

In some states, the “mortgagee” (usually a bank) is considered the owner of a property until the mortgage is paid off. Under either system, mortgages are similar to liens because they both give a lender the right to take property if a borrower doesn’t pay their debt.

Types of Liens

There are many types of liens, but they all fit into one of two categories: voluntary and involuntary. Voluntary liens include loans, like mortgages and auto loans. Involuntary liens can result from past-due taxes and court judgments.

Voluntary Liens

Voluntary liens are created when a property owner agrees to a lien on their property. Mortgages and car loans are examples of voluntary liens. In the case of a mortgage, the homeowner agrees to a lien on their home in exchange for cash. Voluntary liens are also known as “consensual” liens.

Tax Liens

Tax liens are a type of involuntary lien. Tax liens result when a property owner fails to pay taxes. Federal, state, and local governments can place liens on property if the property owner fails to pay taxes. Tax liens can result from past-due property tax or income tax.

Mechanic’s Liens

Mechanic’s liens may be placed on property by a service provider or supplier who worked on the property but was not paid. For example, a plumber who works on a house but does not receive payment may place a lien on the house for the amount they are owed. Mechanic’s liens are involuntary liens.

Judgment Liens

Judgment liens, or judicial liens, are another example of involuntary liens. A “judgment” refers to a court decision in a lawsuit, which can entitle one party to money from the other party. In some cases, the winning party may get a judgment lien on the losing party’s property to make sure that the judgment is paid.

How do Liens work?

Liens are a legal claim on property. Liens entitle the lienholder to take an asset if a debt is not paid. When the value of the lien is less than the value of the property, a property owner who can’t pay a debt often decides to sell the property. Information about liens is often public, so potential lenders or buyers are aware of the liens on a piece of property. Since liens are attached to property, they can transfer from one owner to another if the property is sold. In most cases, liens are paid off when a property is sold.

How to Check for Liens

Liens are recorded with a government office. Liens on real estate are typically filed with a county clerk or county recorder. These offices may make lien information available online or may require you to call or visit the office in person. Title insurance companies can also help with discovering liens.

Liens on other types of property are also recorded with a government agency. Liens on cars are usually filed with the Department of Motor Vehicles or a similar agency, depending on the state.

Lien Release

Lien release is the process used to remove a lien once the related debt is paid. For example, the IRS releases federal tax liens within 30 days of payment. Lien releases do not happen automatically. Once the lienholder is paid, they must file a lien release with the same office that recorded the lien originally.

Avoiding or Removing Liens

A property owner may be able to remove liens without paying the full amount owed to obtain a lien release. Some methods to avoid or remove liens are:

  1. Negotiate with the lienholder to release the lien for a lower amount. Lienholders may be willing to accept less than they are owed to avoid an expensive and time-consuming legal dispute.

  2. File a lawsuit to dispute liens in court. This method may work if the property owner believes a lien is fraudulent or invalid.

  3. Avoid liens through the bankruptcy process. Certain types of liens are eligible for “avoidance.” Judgment liens are the most common type eligible for this process.

Buying Liens

Some people purchase liens as investments. This commonly occurs with property tax liens. A local government sells its tax liens in exchange for payments to cover unpaid taxes. An investor pays the past-due taxes and receives the right to foreclose on the property. It then becomes the investor’s responsibility to collect payment or take possession of the property. There are many risks involved in investing in tax liens.