If someone were to do a search of your name online and you have a lien, it could show up. Liens can be problematic in a variety of ways, and they’re important to understand if you’re facing one.
A lien is a claim against assets or a legal right against them. Liens are typically used as collateral to fulfill a debt. A creditor or a legal judgment can set a lien. The lien is a way to guarantee an obligation that’s underlying, like repaying a loan. If the underlying obligation isn’t satisfied, a creditor may be able to seize the asset that’s the lien’s subject. There are varying types of liens, which are discussed below.
How Does a Lien Work?
Liens are a way for an individual or company to have a right to someone else’s property. Liens are security so that if needed, a person or organization can take property or other legal action if they need to satisfy a debt or obligation. Liens are part of the public record in many cases, so they let potential creditors and other people know about existing debts.
When you buy a house, for example, you’re promising you’re going to repay your lender if you get a mortgage. Your lender might want more than a signature, though, because otherwise, if you stop making payments, they aren’t going to have much leverage.
When the lender files particular documents with local government offices, then they are a lienholder. The debt is secured, and the lender is increasing the chance they’re going to get repaid.
Since liens are public records, they’re letting other potential creditors know there are existing claims to a property. New lenders won’t be the first in line when they want to get repaid, so it would be hard to sell a property until the lien is cleared.
For example, a lien usually keeps you from selling or refinancing your home or car unless you pay off your outstanding debts first.
Liens are usually part of an agreement to buy real or personal property, like a home or car, but they can stem from legal actions too.
Types of Liens
A couple of the main types of liens are discussed above. Home loans include liens. When you borrow money to purchase a house, the property is the collateral. You agree, via your loan agreement, to allow the lender to foreclose on your home if you don’t meet certain requirements.
You, for example, have to make your monthly payments and insure the property. You may also have to live in it as a primary residence for a number of years.
Car loans are similar to home loans. The biggest difference is that rather than forcing you out of your home if you don’t meet the requirements you agree to, a car lender can repossess your vehicle.
Mechanic liens are another type, also known as construction liens. If someone works on your property, they expect they’re going to get paid. If you don’t pay, or a contractor doesn’t pay their subcontractors, the workers can file a mechanic’s lien through the county recorder’s office.
A judgment lien is placed when someone wins a lawsuit against you. They can be a creditor, and if they can’t collect right away, they might be able to file a lien against your property. A judgment loan is a way to make sure damages will be paid eventually if you can’t pay out of pocket.
The IRS and local governments will sometimes use liens as a way to collect taxes that aren’t paid. Tax liens can be attached to both current and future assets. The IRS can collect from bank accounts, and tax authorities may be able to go to the front of the line and collect before any other creditors.
For example, the IRS will usually get to collect before a lender. Bankruptcy may not be enough to eliminate unpaid taxes.
A tax lien placed on your property isn’t the same as a tax levy. When a tax lien is put on your property, you can’t sell it until the lien is settled. A tax levy, by contrast, is how the IRS collects money you owe for taxes. The IRS can levy a bank account, for example, meaning it takes money from your account to pay your debt.
Liens and Your Credit
A lien doesn’t show up on your credit report, but if you get a lien because you didn’t pay a debt, that can. For example, if you have a judgment against you because you didn’t pay outstanding debt, and then a lien is placed on your assets, the judgment shows up on your credit report even if the lien doesn’t.
If you have a lien for a home or car loan and you’re paying the loan as you agreed you would, then your credit isn’t hurt by it.
Removing a Lien
If you have a property with a lien against it, you may be stuck with it until you clear up whatever is causing the lien.
If a lien is legitimate, to get it released, you may have to pay it off.
Liens are typically removed when you sell your home or a car you financed.
Sometimes a lien can be removed if you settle. You can try to negotiate if you don’t have enough money to pay off a debt. There are often creditors willing to accept less than what’s owed if they can get at least some money now and then not have to deal with the loan anymore.
If there’s a lien you believe to be illegitimate, you need to contact the lienholder. Lien releases may be forgotten or lost, so you may need to make a correction by bringing it to the attention of the right person.
If you have a disagreement over a loan, it’s more complex. You might have to take legal action against the holder of the lien to have it released.
Finally, if there’s a lien placed on your assets or property, it could potentially be removed if you file for bankruptcy.
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