What is a lien and how does it work?

If you fail to pay off a debt, a lien can be issued against your home, car, or other personal property to ensure that payment is made. A lien is a method that creditors have for enforcing payments that are owed to them, using various actions, from impacting whether you can sell your property, to enabling a lender to take ownership of your property.

Here’s a simple example of a lien: If you stop paying the mortgage on your home, your bank can put a lien on your home until you pay the balance due in full. If you try to sell your property before the mortgage is paid, the lien will show up on a title check, and you’ll need to repay the bank what you owe them before you can sell the property with a clean title.

Here’s what we’re going to cover:

• How does a lien work?
• Types of liens
• How can you get rid of a lien?
• Oportun: Affordable lending options designed with you in mind

Key takeaways

• A lien is a legal action that a person or lender can take to ensure payment of a debt.
• Someone can enforce a lien against real estate or against personal property, including vehicles, art, jewelry, or other valuables, depending on your state’s laws.
• To lift a lien, you’ll need to repay the debt, work with the lender to settle, or dispute the lien in court.

How does a lien work?

A lien holds a person responsible for paying what they owe, whether it’s by making payments as agreed, or by forcibly giving up their property to satisfy the debt. Creditors, court judgments, contractors and government entities can issue liens. Often, the lien is issued for the property used to secure a debt. For example, in a failed mortgage, the lender may be able to seize the home purchased with the loan.

A lien can be voluntary or nonvoluntary. With a voluntary lien, you knowingly accept the lien in exchange for a loan, as with a mortgage or auto loan. However, you could face a nonvoluntary lien if you fail to pay a debt and the creditor issues the lien without your consent.

Types of liens

There are several types of liens:

Bank lien

A bank lien enforces a bank’s right to leverage personal property like a car to ensure a loan is paid. If you fail to repay, your bank will issue a lien on your property. If that doesn’t result in payments, the bank can sell the property to recoup its debts. Bank liens may also be called real estate or auto liens, depending on the type of property involved.

Tax lien

Tax liens are a way for the government to enforce tax payment. If you’re delinquent on your annual taxes, you may be able to work with the Internal Revenue Service (IRS) on a payment plan. However, if you show no initiative to pay what you owe, the IRS can issue a lien on any of your property, including a home, car, or business. This enables the government to seize your property in order to liquidate it to collect tax obligations from you.

Child support lien

A child support lien may be issued if a parent fails to pay child support as required by a court order. The lien may be imposed on real estate, bank accounts, and other personal property and can only be removed by the court once the balance is paid in full or the requesting party revokes it.

Judgment lien

A judgment lien comes about when a creditor takes you to court after failing to repay a debt. With a judgment lien on your property, the creditor or creditors have a right to the proceeds of a sale of that property, to recoup what they’re owed.

Mechanic’s lien

If you’ve had work done at your home and failed to pay the contractor or subcontractor, they can put a mechanic’s lien on your home. If you try to sell the house, it won’t have a clear title until you repay the lien.

How can you get rid of a lien?

There are several ways to get rid of a lien, depending on its validity and your financial situation:

1. Repay the debt owed: If a lien is legitimate and you understand the debt obligation, the simplest way to resolve the lien is to pay what you owe. Once you’ve paid the debt, the lender can issue a lien release document, which you can use to release the lien from your property.
2. Dispute the lien: If you believe the source of a lien is not valid, you may go to court to dispute it. For example, let’s say you did a kitchen remodel and paid a contractor for the work. If that contractor failed to pay the subcontractor who laid the floors, the subcontractor could put a mechanic’s lien on your property. In a situation like this, you’ll likely want to seek support from an attorney to dispute the lien and resolve the situation. In many cases, there are legal deadlines for disputing a lien, so you should address such matters promptly.
3. Negotiate with your lender: If you accept the lien as valid but can’t afford to pay what you owe, you may be able to work with your lender to pay a lesser amount to settle the debt. Once the loan is considered paid, the lender can issue a lien release document, which you can take to your local municipality office to have the lien removed.

Oportun: Affordable lending options designed with you in mind

Now that you understand what a lien is, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

• Personal loans
• Secured personal loans
• Set & Save™
• And more!

Sources:

Experian. What Is a Lien and How Does It Work?
Forbes. Liens: What They Are And How They Work