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If you’ve taken out a loan to buy a car or house, there’s been a lien on it.
So, what’s a lien and why should you care?
A lien is a legal claim that allows a person or entity (also known as the lienholder) to take possession of your property if you default on a debt, often a loan secured by that property. Lenders use liens as a way to mitigate their risks. If you end up not being able to pay back your loan as agreed, which results in the default, the lender can then try to claim and sell the property to recover its money, though laws can vary by state.
There are several different types of liens, not all of them associated with a loan. You’ve probably heard of liens in the process of buying or leasing a car, or getting a mortgage for your home. But a tax lien, which the government can use as a means of recovering any past-due taxes, isn’t tied to a loan.
It’s important to note here that, from a legal perspective, liens of any kind can be tricky. If you’re confused about a particular lien or want to understand your rights, we recommend speaking with a certified accountant or lawyer.
In this article, we’ll go over liens and lienholders, and we’ll cover some of your options when facing a lien.
When you take out a property or asset loan, lenders put a legal claim on the property, or lien, as a way of helping to ensure they’ll get repaid. This is where collateral comes into play. Collateral is the asset or property that secures the loan and gives the lender, or lienholder, a way to help recover its money if you’re unable to repay the loan.
Secured vs. unsecured loans
Not every loan requires collateral, which means not every loan starts off with a lien.
Secured loans require collateral as a means to cover your lender’s risk. Mortgages, car loans and secured personal loans are all examples of loans requiring collateral. When you take out a secured loan, you’re giving the lender a right to claim the asset as payment for the loan. That claim to your property is the lien.
On the other hand, unsecured loans don’t require collateral. Instead of considering the value of your property or assets, the lender takes into account your credit, financial history and other factors. Unsecured loans are offered based primarily on your overall credit health, which can include your credit scores. So the better your credit, the better the terms you’re likely to see since the lender is assuming less risk. So unsecured loans won’t start out with a lien because there is no property to claim.
A lien on a secured loan is voluntary — you’ve agreed to the loan on the condition that the lienholder has a claim to the property if you default. But there are also involuntary liens, which can be much more complicated to navigate.
Voluntary vs. involuntary liens
A voluntary lien is one where you agree ahead of time to use the property you’re financing as your collateral, as with a secured loan like an auto or mortgage loan. And it’s expressly written into the loan agreement. With a voluntary lien, the lender can repossess your car or foreclose on your home if you default on that agreement, depending on your state’s laws.
But there are situations in which a lien may be involuntary and not necessarily tied to borrowing money. A lien issued by the IRS or liens awarded through a court case, also known as a judgment lien (we’ll get into what this means in the next section), fall into this category.
It’s important to know that not every lender has an automatic claim on your property. And in the case of involuntary liens, your lender or other claimant will have to go to court to be awarded the lien.
Let’s take a look at some common loans that have liens, some liens that are independent of loans, and what it could mean for you if you’re facing a lien.
When you use a mortgage to finance your home purchase, you agree to allow the bank or mortgage lender to put a lien against the home. Essentially, this lien type is a secured loan, with your home providing a means for the lender to recoup its funds if you default.
Should you fall back significantly on your monthly payments, or otherwise default on your loan, the lien gives your lender the right to reclaim, or foreclose on your property, though laws vary by state. The lender is then able to sell your property in an attempt to recover the remaining debt.
Once you pay off your mortgage, you can check with your local secretary of state or county recorder’s office to verify that the lien has been removed. If your home still shows an active lien with the lender, contact the company and request that they complete a release-of-lien form. If your situation is complex, consider getting help from a legal professional.
If you take out a loan to buy or lease your car, your lender may hold on to the car title. Your lender may also file a lien with your state’s transportation agency or Department of Motor Vehicles until your car loan is paid off.
When you’ve repaid the loan, the lienholder may send a lien release document to the DMV so that the car title can be updated and transferred to you.Learn more about car liens
Another avenue that lenders may have when you’re unable to repay a loan or other debt is to sue you for the remainder of what you owe. This type of involuntary lien is most commonly used for unsecured debt, like some personal loans, medical loans or credit card debt.
If your lender wins its lawsuit, a judgment lien can be issued. The lender can then legally take your property per the ruling and sell it, using proceeds from the sale to pay back your debt.
Judgment liens can be attached to real property like your home or personal property like your furniture, appliances or other assets.
For example, if you owe $10,000 on an unsecured personal loan and you don’t pay it back according to your loan agreement, your lender may file suit to have a judgment lien entered against your personal property. If the creditor successfully obtains the lien, it can take that property from you and sell it, unless you repay what you owe.
If you use a contractor for a construction project and fail to pay as agreed, the contractor may file for an involuntary lien against your property in order to get paid.
When budgeting and paying for home improvement projects, make sure that you consider the costs of not just the contractors but also the builders, plumbers, engineers, architects, surveyors and anyone else working on the project. Even the cost of building supplies may be subject to a lien. Like most liens, mechanic’s liens can be tricky. Check the laws in your state and seek out professional legal help if needed.
If you haven’t paid your taxes or didn’t file an accurate tax return, the IRS may file a federal tax lien against your property.
While tax liens no longer show up on your credit reports, you should prioritize paying off a tax lien to avoid the repossession of your property by the government. Keep in mind that you typically don’t have to pay back all the money owed in one big payment. If you’re struggling with the amount due, the best thing you can do is proactively reach out to the IRS. Don’t ignore official communications in hopes the IRS will go away.
Instead, connect with IRS representatives to learn about payment options and create a plan that will settle your debt over a period of time.Learn more: Tax liens 101
A lien can be a scary thing to deal with. Here are a few options that may be available to you when you’re facing an involuntary lien on your property.
● Pay it. Your best bet is to pay off the lien in full and request that it be removed. If that’s not an option, try to work out a payment settlement or payoff amount that works for both you and the lienholder.
● Dispute it. If you think a lien has been placed on your property in error, contact the lienholder to verify whether the lien release was lost or forgotten, or to find out if your payments aren’t being received or some other error has occurred.
● Appeal it. You may also consider filing an appeal of the lien if you believe it was issued in error. This is most common with tax liens where the lien may have been filed against the wrong taxpayer. For more on how to file a tax lien appeal, contact the IRS.
● Get help with it. Since liens can get complex, you may want to consult with a lawyer who can thoroughly explain how liens work and inform you of your rights. A lawyer can also help you out if you need to go to court for your case.
Whether a lien is voluntary or involuntary, a rightful lienholder has a claim on your property until your debt’s been paid.
You may be able to avoid an involuntary lien by alerting your lender to any financial issues you’re experiencing. Dealing with the situation early may help you come to a modified payment schedule, a reduction in payments or another settlement that could be lower than your total debt.
If you need professional help, consider speaking with a certified accountant or a lawyer, who may be better suited to negotiate with your lender on your behalf.