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Liens are legal processes that can be utilized in an attempt to recover owed funds. When a high value transaction is financed, such as a house, building, or vehicle, or when a significant service is performed, the lender or service provider need to protect themselves from being left unpaid. This is where liens come in. Liens are attached to properties as collateral – if there is a lien on a house or vehicle, it cannot be sold without first clearing the lien, which is done by settling debt.
Property liens are liens that can be put on houses, cars, boats, and other physical property. If you buy a house with financing, and default on your payments, the lender has the right to file a lien with the county. Once a lien is processed, it becomes a public record. A property cannot change ownership until the lien is resolved.
Property liens create a path to borrower accountability and repayment. They create a powerful enough consequence which serves as motivation to settle property debt.
There are a number of common scenarios that could lead to a lien:
When you borrow to buy a home or an investment property, it serves as collateral for the loan. A mortgage loan agreement allows the lender to foreclose on your property should you fail to meet certain requirements, such asmaking monthly payments, insuring the property, and paying property taxes. If any of the contractual obligations are not met by the borrower for a period of time exceeding ninety days, the lender can file paperwork to put a lien on the property, in its respective county. A property that has a lien on it cannot be sold and the lien is a public record. This often motivates borrowers to get back on the path of repayment and following the rules of their mortgage.
If a car or boat breaks down, you may seek out an expert to provide repair services. Often repairs are billed after they are performed, and some people delay payment or even fail to pay for the repairs altogether. In these cases, the repair person can initiate a mechanic’s lien. A mechanic’s lien puts a lien on the property being repaired so that the person repairing it can keep it as collateral should their invoices go unpaid. In most cases, this type of lien would be initiated by the repair person not returning the property that was being repaired until a payment is made, and filing paperwork with the county. If the lien is not resolved for a certain period of time, the repair business has the right to liquidate it and keep the proceeds. For this reason, it is recommended that all repair services utilize a written contract that clearly lists the costs of the repairs, when they are due, and penalties for failing to pay in full.
When you hire contractors to build a house for you, or remodel an existing property, you usually sign a contract where you commit to a certain cost, payment schedule, and scope of work. If you default on your payments, your builder can stop the work and file a mechanic’s lien, which will make it impossible for you to sell the property until the lien is cleared. It is important to note that if your contractor fails to pay subcontractors working on your project, they too can file a lien against your property, and your property could be affected through no fault of your own. This means that vetting and researching your contractor is important prior to committing to a building project.
Just like home loans, borrowing money to buy an automobile also includes listing your vehicle as loan collateral. If you default on your payments, your auto lender can take your vehicle from you through repossession or file a lien with your local Department of Motor Vehicles (DMV). If a lien is attached to your car, you will not be able to renew your registration or obtain a title needed to sell the vehicle.
If somebody sues you for money owed and wins, they may become a creditor. If they can’t collect owed funds immediately, they may have the right to file a lien against property you own. This ensures that owed money will eventually be paid back.
The IRS, as well as local governments sometimes resort to collecting unpaid taxes with liens. Taxing authorities can attach liens to your current and even future assets. This means that property you own or may own in the future could be subject to a lien if you have unpaid tax obligations. IRS lines are particularly worth paying attention to – they get priority overother lenders and bankruptcy may not be sufficient to forgive unpaid taxes.
No one wants a lien on their property. To avoid this, you should:
Property liens are a useful tool for lenders and professionals, and a way for borrowers to be held accountable to their financial obligations. By acting responsibly as a borrower and tax payer, and organized as a lender or contractor, most liens can be avoided.