What is a Lien?
In simplest terms, a lien is a legal financial hold that someone who is owed money by you may place on your property to ensure repayment. There are many types of liens on property, and it is important to know these different types of liens in order to either avoid them or figure out how best to navigate them.
Key Takeaways
Types of Liens
Voluntary vs Involuntary Liens
There are two types of property liens under which all the subgroups are organized. These are voluntary liens and involuntary liens. One is done with the debtor’s consent and one is done without their consent.
Voluntary Liens
With voluntary liens, the person who owes money, also known as a debtor, may voluntarily attach a lien on their property to act as collateral in order to convince an entity such as a bank to loan them the money they need to buy their property with. Then they will owe the amount agreed upon to the debt (or lien) holder, also known as the entity to whom the money is owed.
In practice, this means that part of the value of the person’s home now belongs to the lien holder. This type of real estate lien attaches to their property. If they sell their house, the lien will be part of the sale and will have to be paid off before the sale can be final, or as part of the sale price. If the amount of the debt is significant enough, the holder of the lien may be able to seize the debtor’s property in order to sell it and get their money back that way.
If a person who has voluntarily agreed to a lien on their real estate does a good job of steadily paying off that lien, this will be positively reflected in their credit and FICO scores. It can be beneficial for their financial health.
Mortgage Liens
The above is essentially what a mortgage lien is. A person asks a bank to help them buy a house, and the bank puts a mortgage on the house. This means that the bank owns a debt in the amount of the value that was loaned to the person buying the house, and this debt is attached to the house. This is done with the prospective new homeowners consent.
Involuntary Liens
An involuntary lien is when a debt holder attaches a lien on your property without your consent. They do so most often by seeking a judgment in court in the amount they are owed. This lien type frequently happens with unpaid bills such as credit card bills, medical bills, and various other types of loans which have not been paid back in full or at all. This is essentially what a judgment lien is.
Child Support Liens
Child support liens happen when one parent does not pay their full amount of court ordered child support to the parent who has primary custody, also known as the receiving party. The receiving party may ask the court for, and the court may grant, a judgment lien on the debtor’s real estate or other property in order to try to get them to pay.
Construction Liens/ Mechanics Liens
When you enter a contract to have a contractor or a company perform work on your house in order to make improvements, you promise to pay them for this service and if you don’t, they can take out a construction lien, also known as a mechanics lien, on your property. This is one of the types of lien on property, and it means that your house is now subject to that debt, and it can be legally enforced in order to be paid off.
For example, if a roofing contractor performed work on a person’s roof at a cost of $30,000 and the homeowner does not pay, the contractor can attach a lien on the house. This $30,000 debt will be part of the value of the home now.
Tax/IRS Liens
If a person has failed to pay their taxes, the Internal Revenue Service may place a lien on that person’s property in order to secure the necessary payment. The debtor’s property can be sold to obtain the funds owed.
In Conclusion
Think of a lien as a tag which is figuratively attached to a person’s property or real estate. This tag signals to those inquiring about the value of the person's property or real estate that there is a debt owed and that part of the value of the property or real estate has been claimed by the debt holder. This will be a hit to their credit and will negatively impact their financial health unless the lien was voluntary and they have steadily been paying it off. It is important to understand the different types of liens and their impacts to avoid a difficult scenario such as those described above.
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