Whether you've made a life-changing decision to buy your dream home or are pondering if you should buy that car you've been eyeing, if you don't pay for it all on the spot, you'll technically have a lien on your property.
A lien is a financial claim that gives lenders a right to your property if you don't pay back your debt. Lenders attach liens to your assets, which they use as collateral, until you pay off your debt in full. This is how lenders protect their investments, while telling the world you owe them money.
Liens can be voluntary (consensual) or involuntary. A voluntary lien is one that is simply attached to a loan, like a mortgage. An involuntary lien, on the other hand, is one that a creditor places against your assets when they're seeking judgment for nonpayment of debts. Here are some examples of both voluntary and involuntary liens, as well as how to get them removed.
1. Mortgage Lien
When you voluntarily take on a mortgage, the lender agrees to finance your home and takes a lien on your property until you pay off the debt.
You can check if there's a lien on your real estate at your county recorder's office, the recorder of deeds office or the county clerk's office. You can also hire a title company and have them run a title search. And in some places, you can check online, according to Colorado foreclosure attorney Amy Loftsgordon.
The lender releases the lien once you pay off your mortgage. But the lender can foreclose on the property if you miss your monthly mortgage payments.
2. Car Lien
When you decide to buy a car and can't fully pay for it right away, you rely on a lender. The lender finances the car, puts a lien on it and can repossess the vehicle if you don't make your car payments on time.
If you want to find out if there's a lien on your car, all you need is your vehicle identification number (VIN).
"A lot of states will let you run a check online [through the National Motor Vehicle Title Information System]," says Loftsgordon. "Or you can go down to your local DMV and have them pull a record search."
The lender executes a lien release once you pay off the car loan in full. But if you're in danger of losing your car, there's still hope. All states have exemptions on certain types of property. Exempt property is property you can keep despite a collection judgment being on it.
"You need to find out how much is exempt and how to claim the exemption," says Loftsgordon. "You don't automatically get an exemption. You have to make a claim [to the creditor] for it."
1. Tax Lien
If you fail to pay your taxes, the Internal Revenue Service can place a lien on your property, which includes your real estate, personal property and financial assets. This is called a federal tax lien.
A federal tax lien shouldn't catch you by surprise. The IRS sends you a bill, called a Notice and Demand for Payment, which explains how much you owe. The IRS files a Notice of Federal Tax Lien, which notifies creditors that the government has a legal right to your property, if you don't pay the debt in time. You have a right to appeal a federal tax lien. The IRS eliminates the lien within 30 days after you've paid your debt in full.
2. Judgment Lien
Any sort of lender — credit card, medical or other creditor — can hit you with a judgment lien if they file a lawsuit against you for money you owe. A judge awards the lender a right to your property for the amount claimed in the lawsuit. Lenders use judgment liens as the main way to collect the money you owe. For example, if your home is worth $100,000 but you still owe $60,000 on your mortgage, you would have $40,000 in equity in your home. So, a creditor could take from that amount (in some states) if you sell your home.
"You're most likely going to know about the lawsuit and you'll probably know that there's judgment against you," Loftsgordon says. "You'll have some idea to go look for it."
Besides paying off the debt, you can ask the court to remove a judgment lien in most states, if you can prove, for instance, that the correct legal procedures weren't followed. This won't be an easy process, but it's possible. Or you could, as a last resort, declare bankruptcy and have the lien avoided, which could seriously affect your credit rating.
3. Mechanic's Lien
Contractors, subcontractors and suppliers can also be lien-holders. Contractors can place a lien on services they provide, such as repair work or construction on your property, in the amount you owe them if you don't pay for the services. In most states, the contractor is required to let you know if they intend to file a lien, according to Loftsgordon.
"The creditor will likely need to comply with state notice requirements and record documents in the proper government office to perfect a valid mechanic's lien," says California bankruptcy attorney Cara O'Neill via email. "If the mechanic's lien is valid for a limited time, the lienholder will likely need to file a lien foreclosure lawsuit to avoid voiding the lien."
The contractor can proceed to collect the judgment if you can't settle the case. You can remove this lien by paying what you owe. The lienholder has the responsibility to remove the lien once you pay. It won't be removed automatically. If you feel you have a valid reason for not paying (for instance, the work wasn't completed), try to negotiate with the contractor by showing your evidence (invoices, photos, etc.) If that doesn't work, you may have to go to court to have it removed.
"It might also be possible to remove a lien in bankruptcy," O'Neill says. "Or, if the debtor files the bankruptcy case quickly enough, prevent it from attaching altogether."
Another method for getting rid of lien is to offer partial payoff to a lienholder. "Not everybody knows that you could offer up a lump sum, like half of what your debt is," Loftsgordon says.
4. Other Types of Involuntary Liens
Your homeowners or condominium association can place a lien on your property if you don't pay your monthly fees. But the association warns you about this beforehand. The court can also place a lien on your property if you don't pay your child support.