You may have heard the term “lien” thrown around, particularly in the context of debt collection. But what is a lien? How do you file one, and how do you get rid of one? Take a look at our answers to these common questions.
What is a Lien?
A lien is created between a lender (also known as a creditor) and borrower (or debtor) to secure a loan or the performance of a duty or service. But what does it mean to “secure” a loan?
Many lenders ask borrowers for a security interest, which is something of value that the borrower promises to the lender should they fail to repay the loan. Often, the item of value is a house or a vehicle. If the borrower doesn’t pay off the debt, the lender can put a lien on the property, which is a public notice stating their right to the sale proceeds of that property.
How do Liens Work?
It’s important to know that you can’t simply lien an asset just because someone owes you money—you need to be entitled to a lien claim, which can only happen in two instances. The first is if the debtor gives the creditor written permission to file a lien. For example, the paperwork you sign when purchasing a vehicle usually contains a security agreement outlining the dealership’s interest in your vehicle if you default on payments.
The second instance where a creditor can claim a lien is as a matter of law. State laws differ widely, but some common types of liens include:
- Mechanics lien: To guarantee payment, a general contractor may file a lien for the value of the labor or material they supply to a construction project.
- Tax lien: The IRS can file a lien on your home if you fail to pay your income taxes.
- Judgment lien: If you lose a lawsuit, the winning party can file a lien against your assets until you pay them.
How do you File a Lien?
Filing a lien creates a public record, and can be both expensive and adversarial. Be sure to give the debtor adequate notice and opportunity to settle the debt by requesting payment with a Demand Letter, through mediation, or by hiring a debt collection agency.
Each state has different laws for filing liens, including preliminary notice, deadlines, filing location, and filing fees, so be sure to consult your state’s government website for more details.
How do you Remove a Lien?
Removing a lien is essentially a matter of settling the claim, and there are a number of ways you can do it, depending on the type of lien. Paying off the debt is one way of removing a lien, but if you’re unable to repay in full, you may be able to work out a settlement with the creditor through arbitration or mediation, whereby you pay a lesser amount or a lower interest rate.
Once the debt is satisfied, it’s important to remove the lien by filing a lien release form and filing it with the county clerk’s office.
It is in your best interest to remove a lien, particularly if you plan to refinance or sell your property. For instance, let’s say you’re selling your home. You may have a difficult time finding a buyer, because a lien affects the transfer of title, and many banks and lenders refuse to provide mortgages if there is an outstanding lien on the property.
Liens can be complicated, so whether you are a creditor seeking payment or a debtor with a lien on their property, this may be a situation where you should consider consulting an attorney.
Have you dealt with a lien claim before?