What Is a Lien and How Does It Work?

How Does a Lien Work?

When you offer collateral for a loan, the lender must guarantee that it can seize the property to recoup its loss if you default on your debt. A lien is a legal claim that helps creditors do this.

There are two main types of liens: voluntary and involuntary.

• Voluntary: Voluntary liens are ones you agree to, like what happens when you get a mortgage or car loan. For example, when you take out a mortgage, the lender retains the right to seize your home to recoup what they're owed until the loan is completely paid back. This legal claim is done through a mortgage lien that gets removed once you've paid off the debt.
• Involuntary: By contrast, involuntary liens are third-party claims against your assets that you don't consent or agree to. Involuntary liens are typically placed on your assets by a court; they give a creditor legal claim to what they're owed and can result in foreclosure if they go unpaid.

Voluntary and involuntary liens do essentially the same thing, but the difference is involuntary liens are considered derogatory as they are a result of non-payment. Voluntary liens—like your mortgage or auto loan—are just a side effect of borrowing, as they provide an avenue through which a debt can be collected if you default on your obligation.

What Are the Different Types of Liens?

Several types of liens can be filed against you. As mentioned, some liens are voluntary, and others don't require your consent because they're filed by a creditor as a result of non-payment.

The following are the different lien types and the circumstance around how each are established:

Real Estate Lien

A real estate lien gives a creditor the right to seize and sell real estate property if someone defaults on an agreement. Mortgages are common real estate liens, and are an example of a voluntary lien you agree to when you borrow money to buy a home.

Additional liens can be placed against your real property, which can be both voluntary and involuntary. If you take out a second mortgage on your home, or use your home equity as collateral for another loan, a second (or third) lien would be recorded against that property. In this case, the lienholders (the creditors) would be given priority based on when the lien was filed. Lien priority comes into play when you sell your home and also dictates who gets paid first if the property is ever liquidated or foreclosed.

Bank Lien

A bank lien is a lien that gives a bank a legal right to assets you pledge as collateral for a debt or loan, such as a home, car or personal loan. As such, the bank has the right to seize the collateral and sell it to recoup its loss if you default on a debt.

Tax Lien

A tax lien is an involuntary lien placed on your property if you fail to pay state or federal taxes. Tax liens are given priority over all other liens, which means they must be paid first. Federal and state tax liens can be placed on assets, including personal property. When left unpaid for extended periods of time, tax liens could result in the forced sale of your property, at which time all or some of the additional lienholders would be paid what they are owed from the proceeds of the sale.

Judgment Lien

A judgment lien is placed on your property or assets by a court that establishes you have an outstanding debt. Creditors that can prove you defaulted on an agreement and owe them money can file judgment liens in local courts. As with other liens, if your property is sold, the lienholders will be paid from the sale proceeds.

Mechanic or Construction Lien

Liens of this type must be filed through court and are placed against real property for which a contractor or subcontractor has performed work and was not paid by the property owner. A construction or mechanic lien can only be placed on the property the creditor worked on.

Child Support Lien

Most states allow liens to be placed on a parent's property when they fail to pay court-ordered child support. These liens can be attached to real estate, vehicles, bank accounts and other valuable assets. The lien stays in place until all overdue support is paid and the child is no longer eligible for support, or until the custodial parent agrees to cancel the lien.

Does a Lien Appear on Your Credit Report?

As of 2018, liens no longer show up on your credit report. However, with real estate and bank liens, the loan associated with the lien is still listed on your credit reports.

The three national credit bureaus (Experian, TransUnion and Equifax) eliminated records of civil judgments and tax liens from credit reports after a Consumer Financial Protection Bureau study discovered difficulties reporting such information accurately.

Currently, the only public records listed in credit reports are bankruptcies. Records of Chapter 13 bankruptcy remain in credit reports for seven years from the filing date; records of Chapter 7 bankruptcy remain on reports for 10 years from the filing date.

What Happens if I Don't Pay a Lien?

When you pay off a lien, it is removed from your property. However, if you fail to pay a lien, your lender or creditor has the right to seize the property or asset to cover the debt. For example, if you don't pay a mortgage lien, the lender could foreclose on your property and sell it to recoup their loss. In this case, the sale proceeds are used to repay the lienholders, provided there's enough to cover the liens.

In many cases, non-mortgage lien foreclosures are rare, but still possible. In most scenarios, the creditor who filed the lien will have to wait until you sell the home or refinance, at which point the lienholders will be entitled to what they are owed.

If foreclosure proceeds aren't sufficient to repay all debts, remaining creditors can still go after outstanding balances. Also, liens can be transferred to other current or future properties owned by the debtor.

How an Unpaid Lien Can Negatively Impact Your Credit

While unpaid liens don't appear on your credit report, they can hurt your credit since your lender reports your payment history to the credit bureaus. Consequently, a record of non-payment could appear on your credit report. Remember, your payment history is the most important factor in calculating your credit score, accounting for 35% of your FICO^® Score^☉, the credit score used by 90% of top lenders.

It's also worth noting that, even though liens don't show on your credit report, they can appear in public records. If a lender discovers an unpaid lien in a public record, it could impact your ability to qualify for new credit.

How to Remove a Lien

Generally, you have a few options to remove a lien against your home, car or other property:

1. If the lien is valid, the best way to remove it is simply to pay it off. Contact the lienholder to determine the exact balance you must pay to satisfy the lien. Your lender may be willing to set up a payment plan.
2. Once you repay the debt, have your lender sign a lien release document giving up their claim on your property. File the signed release form at your local county recorder's office to remove the lien against your property.
3. If you're unable to repay your debt, you may be able to negotiate with your creditor for a reduced settlement amount, often in exchange for a single lump sum payment.
4. If you dispute the lien's validity, you can take the matter to court and a judge may dismiss it if the lienholder can't prove the lien is valid.

Pay Attention to Your Credit

While liens don't appear on credit reports, missed payments do. These non-payments can damage your payment history and, consequently, your credit score. Shore up your credit by making consistent and on-time debt payments. It's also wise to keep your credit card balances low since your credit utilization ratio—which measures the amount of credit you're using against your available credit—accounts for 30% of your credit score.

Stay on top of your credit by getting your credit report and credit score for free from Experian. You'll find out where your credit stands and see what factors may be impacting your scores.