Ever wonder why your bank is so confident you’ll repay your car loan? Or why your mortgage lender seems fine putting up hundreds of thousands of dollars to help you buy a new home?
It’s because they have a backup plan — a lien. Depending on the terms of the loan or debt, unpaid bills often become liens attached against your property: your car, your home, or anything else of value. If you don’t pay up, the credit is within their rights to seize and sell the property.
In many cases, you’ll know ahead of time what’s at stake, but not all liens require your permission.
As legal terms go, liens are pretty simple to understand. And it’s vital that every consumer and borrower take the time to do so.
What Is a Lien?
A lien is how creditors attach a debt to an asset you own. In other words, how one of your assets becomes collateral.
For a common example, look no further than mortgage loans. When you borrow money to buy a house, you sign a deed of trust or mortgage document that volunteers your new home as collateral for the loan. Signing that document means you acknowledge and accept that the lender attaches a lien to your home.
That lien ensures the lender gets at least some of their money back if you default, or stop making payments. If you default on your mortgage, the lender forecloses and sells your house to recover as much of their loan as they can.
How Lenders Use a Lien to Secure Your Loan With Collateral
When creditors secure a lien against an asset you own, they gain the legal right to use that asset as collateral. If you default, they repossess the collateral to cover your outstanding loan balance.
In many cases, you voluntarily put your assets as collateral with a lien. When you borrow any type of secured debt, such as a mortgage, auto loan, or secured equipment loan, you sign a document allowing the lender to attach a lien to the collateral.
But not all liens are voluntary. For example, if you refuse to pay a roofer after they replace your roof, they can take you to court and win a mechanic’s lien against your home.
When you go to sell large assets like homes or cars, you must pay off all debts secured by a lien. That includes not just voluntary liens like your mortgage but also involuntary liens such as mechanic’s liens.
Types of Liens
There are many different types of liens, to secure many types of loans with collateral. Here are the most common liens you’ll likely see.
If you’ve ever taken out an auto loan to buy a car or truck, you have firsthand experience with a vehicle lien.
At closing, you signed a document agreeing to let the bank put a lien against your new car as collateral for your loan. Pay as agreed and the lender removes the lien at the end of your car loan term. Fail to pay as agreed and the bank repossesses your car.
Real Estate Lien
Liens are common in the real estate industry. This is due to the enormous value of the assets and the fact that they can’t be moved or hidden.
Like car liens, mortgage liens secure your home as collateral for your loan. After all, most homebuyers can’t afford to pay entirely in cash, so they take out a loan and put up the house as collateral.
It’s precisely why mortgage loans are so much cheaper than other types of loans. Lenders price their loans based on risk, so they charge far less when they have collateral that can’t go anywhere.
Property Tax Lien
Unlike mortgage liens, property tax liens are not voluntary.
If you don’t pay your property taxes, the government doesn’t just say, “No problem. Pay us back when you can.” They secure a lien against your property for the amount you owe in back taxes, plus interest and legal fees.
States vary in how they handle property tax liens.
In some states, the local government forecloses, similar to a mortgage lender. In others, they put your property up for sale in a tax auction. Depending on state laws, the buyer might only win a tax lien certificate. They then have to initiate foreclosure proceedings themselves.
Homeowners Association (HOA) Lien
Homeowners associations can attach liens to your property if you fail to pay your HOA dues.
However, HOAs don’t usually foreclose on these liens. They don’t want to see the neighborhood home values drop as properties go up for foreclosure. Also, the foreclosure process is often more expensive than the amount owed in HOA fees.
Instead, they simply let the fees and interest compound. They collect when you go to sell the property.
Mechanic’s Lien on a House
As outlined above, mechanic’s liens offer a way for contractors to collect money owed to them by homeowners. Should you fail to pay a contractor as agreed, they can go through the legal process of attaching a mechanic’s lien against your home.
That usually involves first sending you a demand notice, then filing in local court for a lien. You can challenge the lien in court, but the onus is on you to do so.
If the contractor files the mechanic’s lien after the owner sells the property, it’s still valid against the property in most states. It just becomes the new owner’s problem.
Federal Tax Lien
Municipal governments aren’t the only ones who can attach liens to collect their taxes.
If you stiff the IRS, they pull out all the stops when coming after you. In fact, federal tax liens work differently than other types of lien. They attach to you personally, and to all of your personal property, not just one single asset.
These liens let Uncle Sam come after your home, your vehicles, your savings accounts, your brokerage accounts, your business assets, your fishing boat, even your pageant-winning Shih Tzu.
Federal tax liens appear on your credit report and hurt your credit score. The IRS sends notice to other creditors, asserting that their claim should take priority. Any new assets you acquire after the federal tax lien gets recorded are also subject to it. Even if you declare bankruptcy, you can’t erase federal tax liens.
State Tax Lien
State tax liens work similarly to federal tax liens, although they don’t usually have the same power to jump ahead of other creditors in priority.
If you fail to pay your state income taxes, estate taxes, some types of business taxes, or any other state-level taxes, they can secure a tax lien against you personally. That enables them to come after any assets you own in that state, including your home, vehicles, bank accounts, and beyond.
When someone sues you and wins, the judge grants them a money judgment, which they can legally collect through any allowed means. Among those allowed means: filing for a lien against your assets, such as real property or vehicles you own.
This creditor can then foreclose on your real estate or repossess your vehicle. Or simply wait until you go to sell your home or car, and rack up interest and fees in the meantime.
Like federal and state tax liens, judgments appear on your credit report and damage your credit score.
Child Support Lien
If you fail to make court-ordered child support payments, the other parent can file for a lien against your property.
Some states allow people to file directly in court to secure a child support lien, without a hearing before a judge. Others require plaintiffs to get a money judgment for owed child support before they can attach a lien to the other parents’ property.
The Uniform Commercial Code (UCC) is a set of business laws that cover commercial transactions in all 50 U.S. states.
When you take out a secured business loan, such as a loan secured against a piece of heavy agricultural equipment, the lender can file a UCC lien against that equipment. To record the lien, your lender files a UCC-1 financing statement with the Secretary of State’s office in your state. That prevents you from transferring title to that piece of equipment without paying off your business loan in full.
These liens are only valid for five years, unlike other types of liens. If the borrower hasn’t repaid the loan in full after five years, the lender can file to renew the lien with the local Secretary of State office.
How to Get Rid of a Lien
The simplest way to get rid of a lien is simply to repay your debt in full. Once paid, the creditor files a lien release on public record, and sends you a copy as well.
As with anything else in life, you can try negotiating the debt balance down. Many creditors will work with you on the balance, but only if they see the alternative as collecting nothing at all or waiting years to collect. Never tell creditors that you’re preparing to sell your house, for example — they’ll know you have no choice but to repay them in full when selling.
Alternatively, you can fight the lien in court. But that only works if you believe the creditor got their lien through fraud or other invalid means.
You can also remove most liens through a Chapter 7 bankruptcy. Don’t expect bankruptcies to remove IRS tax liens though.
Finally, you can wait until the statute of limitations on the lien expires. Each state has its own rules for how long liens remain valid, so double-check your state’s laws. For example, in California, contractors must file a foreclosure lawsuit within 90 days of filing their mechanic’s lien, although they can extend the deadline. Mortgage liens don’t expire at all, in any state.
On the federal level, judgments disappear after 10 years, although creditors can renew it once, for a potential total of 20 years.
Note that dying doesn’t necessarily make a lien disappear. Liens attached to real property stay attached, and must be paid if the estate sells the property. But some assets can pass directly to heirs outside of probate, and dodge creditors looking to collect on judgments if the estate is insolvent.
Liens and collection laws can get complicated quickly. These lien questions come up often in the course of business.
What Is a Lien Sale?
Lenders sell debts and loans all the time. When a debt is secured by a lien, the lien transfers with the debt.
For example, most mortgage lenders don’t keep your loan on their own books after you settle. They sell the loan to a major financial institution like Chase or Wells Fargo, which takes over servicing your loan. If you default, they can use the lien to foreclose on your house in order to satisfy your debt.
Tax lien certificates offer another example of a lien sale.
What Is a Tax Lien Certificate?
Municipal governments can sell off your tax lien certificate if you fail to pay your property taxes. An investor buys it at tax sale and gains the right to foreclose on your home to collect the debt.
Not all states use tax liens to collect on back property taxes. Some use tax deed sales to simply foreclose on your property.
What Is a General Lien?
General liens attach to you personally, rather than a specific asset you own. The best example of a general lien is an IRS tax lien.
Specific liens attach against one asset. For instance, a mortgage lien attaches specifically to your house but not any of your other assets.
What Is a Subordinate Lien?
Subordinate liens take lower priority than other liens already recorded against your asset.
For example, when you take out a second mortgage or a HELOC on your house, that loan is known as a second lien. It’s so known because it takes second position behind your first mortgage.
If you default on a second lien, the lender can still foreclose. However, the proceeds from the foreclosure sale would first go to the lender in first lien position. Only after that’s paid in full does the second lender receive any money. It’s precisely why second mortgages come with higher interest rates than first mortgages.
What Happens When a Lien Is Put On Your House?
When a creditor attaches a lien against your house, it secures your home as collateral. But at that stage, nothing happens per se. That lienholder simply has a legal claim to force the sale of your home if you fail to pay them as agreed.
Should you default, they can then file for foreclosure to forcibly collect their debt.
What Happens When a Lien Expires?
When a lien expires, the creditor loses their legal right to use that asset as collateral for a debt. They can no longer repossess or force the sale of your property to satisfy the debt.
For example, if a contractor filed to foreclose an expired mechanic’s lien, the county court might reject the motion outright. Even if they allowed it through, you could file in court to stop the foreclosure because the lien has expired.
Voluntary liens that come with secured debts actually help you. Any collateral you put up lets you borrow money at lower interest rates than you’d otherwise be able to. For an easy illustration, compare the interest rates on credit cards to those on HELOCs.
Involuntary liens, such as IRS liens on unpaid taxes, are nothing but bad news. When you don’t pay certain bills, the creditor can force you to pay by attaching a lien to your assets.
Consider negotiating a low payoff for your liens long before you actually want to sell any assets. For example, tell your creditor they can either take a 30% payoff now — or they can wait another 15 years for you to sell your home.
This strategy doesn’t always work. But creditors do often decide to take what they can get and close out the account rather than wait around for a sale that could take decades to happen.