What is a Lien?

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Definition:

A lien is a legal tool used to secure debt — The item financed is often used as collateral that can be taken from you if you fail to repay your debt.

🤔 Understanding liens

When a bank, finance company, or other lender finances property for you, you don’t fully own that property until you have paid the amount financed. Instead, the property generally has a lien placed on it as a way to secure it until you finish paying what you owe. Liens are normally used for large purchases, such as a home loan or car loan. But they can often be placed as security for services such as construction or car repairs, and can be placed for nonpayment of taxes as well. Having a lien on your property gives the lender or creditor the legal right to repossess that property if you neglect to pay as promised.

Example

Bank of America (BAC), as the second-largest lender in the United States, holds millions of dollars worth of liens against real property. When it approves a home, automobile, business, or other loan for tangible property, it maintains a legal right to that property until the loan is repaid in full. If you were to borrow money from BAC for a new home and you neglected to keep up with your payments, it could legally take possession of that home and sell it to someone else.

Takeaway

A lien is like giving the bank your car for a little while (or maybe forever)…

Let’s say you take out a loan in order to pay for a new car. When the bank approves this loan, they have a legal right to your car until you pay back the loan in full. If you fail to make your payments on the loan, the bank can take your car and sell it. The bank owns your car now and can do with it what it pleases since you couldn’t pay them back.

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Where do liens come from?

Most liens come from borrowing or owing money. The most common types are real estate liens and vehicle liens, but sometimes they can also be levied against personal property by service providers or your state or federal government.

Mortgage Liens

If you’re like most homeowners, you likely took out a loan to buy a house. Most lenders will not simply trust you to pay that loan back without question. Instead, they require collateral to secure the loan, and the house itself is tangible collateral for them to use. If you neglect to make your loan payments on time, the bank can kick you out of that house and sell it again to someone else.

They retain legal rights to the house until you finish paying off the money borrowed. You have legal restrictions about what you can do with the property. You cannot sell it and keep all of the proceeds, nor can you use it as collateral against a new loan unless the lienholder approves.

Creditor Liens

Liens are frequently used as legal tools for other types of creditors as well, such as auto finance companies. When you buy a car on credit, the finance company often holds legal rights to that vehicle. If you don’t make the payments as agreed, that finance company can legally come and take the car away from you.

Contractor Liens

Another type of lien happens when you hire a service contractor. You might hire someone to make repairs to the roof on your home, for instance, or you might hire a mechanic to fix the motor in your car. These contractors may place a lien against your property as a way to provide themselves with insurance. If you fail to pay the bill they remit to you, the mechanic’s lien or judgment lien gives them legal recourse to sell your property to someone else as a way to recoup their losses.

Tax Liens

Tax liens are used by local and federal government offices as a way to collect unpaid taxes. These are common recourse for collecting unpaid income taxes or unpaid property taxes. A tax lien can be placed on real property such as an automobile, home, boat, or bank account if you’ve neglected to pay your taxes properly. If you owe income taxes, for instance, the IRS may seize your property and sell it at auction as a way to collect all or part of the debt you owe them.

How do liens work?

Liens are a legal tool. They allow you to borrow money against real, tangible property. They work by keeping the legal ownership with the lender until the borrower has paid off the amount of money owed.

In other words: You don’t own your house, car, or any other asset outright when there is a lien on it. Depending on the type of lien, the lienholder either maintains ownership or has a right of claim to your property. This means they may be able to legally take possession of it if you break your contract with them. The lienholder often sells the property to someone else in an attempt to recoup most or all of the remaining money owed to them.

Liens are also used as a way to guarantee payment for services. A contractor may place a lien against your home before starting a renovation, for instance, or an automobile service center may place a lien against your car before doing extensive repairs. By placing a lien on the property, the service provider has some level of insurance that you will pay for the work performed.

If a lien is levied against you for nonpayment of a bill, that lien generally makes it legal for the lien holder to seize your property and auction it to the highest bidder. Money made from the auction is applied towards the debt that you owe, minus any other expenses the lienholder incurred (i.e., towing and auction fees, for instance) until the debt is cleared.

Judgment and property liens can be limited from one state to another, based on type, equity, and local laws.

Is it bad to have a lien?

A lien is normal to have on a property that is financed by borrowing. Not many people pay cash outright for a home or a new car; thus, a lien is automatically put into place as a way to secure the financing. Secured collateral liens of this sort are completely normal and not considered bad.

Liens that are put into place due to nonpayment of taxes or other debts, however, are often considered bad. Tax liens generally take first position legally. This means that if a property is seized and auctioned, net proceeds from the sale of the property go toward paying the back taxes first. If there is also an existing finance loan — such as on a car or house — then there may not be enough money left from the sale to pay that loan in full. This can be bad for you because you’ll still owe some or all of your unpaid debt but have no collateral that can be sold to pay it off.

How do you prevent a lien?

Preventing a lien is as simple as never taking out a secured loan, never falling behind on taxes, and never hiring contractors or planning expensive work that is not paid for upfront. If you can pay cash in advance for purchases and services, and pay your taxes on time, you will never have a lien. However, for many people, this is impractical.

Fortunately, not all liens are bad. A voluntary lien tied to a home loan or a financed car purchase is not typically viewed in a negative way. As long as you stay up-to-date on your payments, having this type of lien shouldn’t create any repercussions.

How do you remove a lien?

The best way to remove a lien is to pay off the debt that created the lien. If you financed a car or house, pay off the loan in full. If you need the lien removed so that you can legally sell the property in question, you may be allowed to sell it and use the profits to pay off the remainder of the loan, then keep the difference. Speak to your lender directly about these options.

For liens brought on by tax obligations or other creditors, you can remove those liens by paying off the bill that caused the lender to levy a lien against you. If you’re unable to pay it in full, the next best step is to speak to the lender directly and negotiate repayment terms.

Some liens will expire in time if there is a statute of limitations on them. In those cases, you may be able to simply wait it out.

In all cases, double-check that the facts are accurate. Sometimes mistakes are made, and if you feel the lien is unwarranted or incorrect, you may be able to obtain a court order to have it removed.

If you’re not sure which step is the best for you, consider speaking to an attorney who specializes in property liens.

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