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Don’t get slapped with a lien! Learn what it is and how to avoid it

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A property lien is an official notice that a property owner owes money to a creditor. The lien gives the creditor the right to sell collateral property (such as a house, mobile home or vehicle) to pay the debt if the owner refuses to pay it.

For example, when a bank loans money to a customer for purchasing a vehicle, it places a lien on the vehicle until the loan is paid in full. The title stays in the name of the buyer, but the lien makes it impossible for the buyer to sell it without first paying back the loan. Property liens are considered voluntary liens because the creditor and the property owner agree to the terms instead of going to court for a judgment.

Lawsuit can result in 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, and courts can allow them without formal notice to the property owner. In some cases, they 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.

Government has power to place 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.

Property lien can hinder refinance efforts

In order to sell a house or vehicle, the property must have a clear title. This means that no creditors have a claim to the property and that the person selling the property is the legal owner. When a creditor places a lien on a property, the property no longer has a clear title, and the owner cannot sell the property until the debt is paid or the judgment expires. A property lien also makes it difficult for homeowners to refinance their homes or to qualify for second mortgages or home equity loans.

How creditors collect from property liens

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 the 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 payment 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 to remove a property lien

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.

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.

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