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What is a lein and how do avoid them?

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A property lien is an official notice that a property owner owes money to a creditor. It gives that creditor the legal right to sell that property if the owner refuses to pay their debts.

A lender can place a lien on a home, vehicle, or other asset used to secure a loan. A common example is a home, which has a lien placed on it when you use a mortgage to buy it. If you don’t pay your loan, the lender can foreclose on you.

What is a lien?

A lien is a legal claim that a lender or other party makes against an asset because the owner owes money to the creditor.

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

A voluntary lien is one that both parties agree on. For example, when you get a mortgage to buy a home or use an auto loan to buy a car, you agree that the lender has a lien on your home or car.

Involuntary liens occur without the consent of the person who owes money. There are a few situations where involuntary liens can be placed against your assets.

Judgment lien

Judgment liens are the result of a lawsuit in which a creditor sues a borrower and wins in court. Unlike property liens, judgment liens do not require the consent of the property owner. Courts can allow them without formal notice to the property owner.

In some cases, judgment leins apply even to individuals who do not own property at the time of the judgment. The court may allow the creditor to place a lien on future property the defendant buys.

Tax liens

The government has the right to place a lien on property owned by someone who fails to pay income tax, property tax or other federal, state and local taxes.

Unlike other types of liens, tax liens have priority over mortgages, which means that if the homeowner sells the property, the proceeds go to pay the back taxes before paying the mortgage. For this reason, some lenders agree to pay the delinquent taxes and add them to the mortgage.

Mechanic’s liens

These liens can go into place if you hire a contractor to help renovate or repair your home. If you fail to pay your bill, the contractor can place this lien on your home.

HOA or condo liens

If your home is part of a homeowners’ association or condo association and you fail to pay your dues, the organization can place a lien on your home until you get current on your bills.

What happens to your home equity if there is a lien on your home?

Having a lien on your home can restrict what you can do with your home and the equity you’ve built in it.

One of the first things that lenders look for when you apply for something like a home equity loan or line of credit is active liens against your home. These liens can take precedence over their claim to your home, putting them at much higher risk if you default. That makes it almost impossible to borrow against your home equity or to refinance.

Liens also make selling your home almost impossible because lenders won’t give a mortgage to someone who wants to buy a home with a lien against it.

How do creditors collect from a lien?

In some cases, creditors can force foreclosure or the sale of the property with the lien, but they rarely do so unless the owner owes a significant amount of money. One reason for this hesitancy is that the creditor must make regular payments until someone else buys the property.

For example, if a utility company places a lien on a house for an unpaid bill and decides to force a foreclosure to collect the debt, the utility company has to pay the mortgage on the property until it sells.

Even after the owner sells the property, the mortgage company gets paid first, possibly leaving the utility company with nothing to reclaim. For this reason, most creditors prefer waiting until the homeowner decides to sell the property and take payment at the closing table. Tax liens, however, are an exception to this. The IRS can, and does, seize the assets of taxpayers who ignore tax liens placed on their property.

How do you remove a lien from your property?

The simplest way to remove a property lien is to pay the debt in full or negotiate with the lienholder for more favorable terms. After receiving the payment for the debt, the lienholder should apply to local authorities to remove it. Homeowners should keep meticulous records of the payments and verify that the lien no longer exists.

If you don’t have the funds to pay the lien, you can always try to borrow money to cover the cost. However, this can be difficult to do because getting to the point of creditors placing a lien on your home typically means that you have poor credit.

It also means trading one unaffordable bill for another one because you’ll have to find a way to pay back the new loan.

Homeowners who believe the lien is not valid can seek a court order to remove the lien. A judge has the ability to issue a court order if the homeowner has proof that the lien is unlawful or that he paid back all of the money owed.

In some states, liens are valid for a specific period of time unless the lienholder applies to extend the lien. If the lienholder waits too long, the lien may expire, leaving the lienholder unable to collect the money.

Bottom line

Most people have voluntary liens on their property in the form of a mortgage. However, dealing with an involuntary lien can be a big headache because it places major limits on what you can do with your home. In the worst case, you could lose your home, making it important to deal with these liens as soon as possible.

Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
Edited by
Loans Editor