A lien is a legal claim on the property that is not paid or settled until the owed debt has been paid. A lienholder is an individual or entity who has the claim, such as a lender. Learn about liens and how they protect lenders.
What is a Lien?
A lien is a legal claim against property that allows the lienholder to seize control or to pursue legal action to settle any outstanding debts. When a person is unable to pay their debts, liens act as collateral and last until the debt is paid.
How a Lien works
Consider the lien you place on a car that you purchase for your business. The dealer would purchase the car and then place a lien on the vehicle. The bank holds a security interest in the property so that the vehicle’s ownership remains with them. If the borrower defaults on the loan, they can also sell the car to recover the loan amount.
A loan with a lien can have three outcomes:
- You make all payments and remove the lien.
- You cease making payments and the lienholder retains the title until the property has been sold or paid for by another person.
- To release the lien, you must pay the remaining debt and then have the right to sell the property.
Asset lien payments must be paid when the owner of the asset sells it. They can’t get payment until that happens. The lien on a car will not be released unless the entire amount is paid. In most cases, you can’t use the property until it is paid in full.
Types of Liens
A consensual lien is the one you agree to or consent to when purchasing something through financing. One example is taking a lien on your car loan with the car as collateral. A court order is issued to place a claim on an asset in order to collect unpaid debts. These statutory liens are:
- Tax liens
- Mechanic’s liens
- Attorney’s Liens
- Judgment liens
A tax lien is a lien that is placed on someone’s property by a federal or state government to prevent them from paying taxes. It gives the government a security interest in their property and must be paid before they can get a mortgage. The tax lien attaches all assets of the debtor, including property, securities, vehicles, and the right to accounts due (payments from customers). It can also attach to any future assets that you acquire during the term of the lien.
Most often, a mechanic’s lien is brought by a contractor or subcontractor. Contractors who work for homeowners who refuse to pay must file a lawsuit against them. You can use the judgment to place a lien against your home.
An attorney can obtain a lien to secure a client’s property while they pay legal fees. An attorney can obtain a lien to hold a client’s property until they pay for legal services. This type of lien is very common in small claim court cases.
Liens in Bankruptcy
Because they are secured loans or repayments of debt, liens can also be a part of bankruptcy proceedings. These liens can be discharged during bankruptcy and the debtor is free from any liability for the debt. However, some liens may remain even after bankruptcy. This is also true for tax liens. The type of bankruptcy determines the timing of the discharge.
How to get rid of a Lien
The best way to remove a lien is to pay the entire amount. A “release of lien”, a written statement that releases the property from the threat of a lien, is called a “release of lien”. This happens most often in cases of a mechanic’s lien or tax lien. This document should be signed at the time of payment to prove payment and assure that no judgment will be placed on the property.