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What Is a Lien?
A lien is a legal claim or legal right against an asset such as property. Liens are typically used as collateral to satisfy a debt. This action provides security by giving an organization or individual the right to take possession of an asset or to take legal action to satisfy obligations or debts. A lien acts as a guarantee of an obligation, such as repaying a loan. A person or organization that files a lien is known as a lienholder.
A lien can be established by a creditor or a legal judgment. If the obligation isn't satisfied, a creditor may have the ability to seize the asset that is the subject of the lien.
Types of Liens
Various liens exist to secure assets. Liens are generally part of agreements to purchase real or personal property such as homes or auto loans. In situations where someone has a legal right to another person's property, this type of arrangement could qualify for a lien. Examples of liens include the following:
- Home loan
- Auto loan
- Judgment lien
- Mechanic's and construction lien
- Tax lien
The property you buy serves as collateral when you borrow money to purchase a home. A loan agreement will include your agreement to allow your lender to foreclose on your property if you don't meet stipulated requirements. Requirements you need to fulfill may include the following:
- Insuring the property
- Making monthly mortgage payments
- Living in the property as your primary residence for a specific number of years
You may take out an auto loan if you buy a vehicle through financing. If you get a vehicle title loan, a type of secured loan in which borrowers use the vehicle title as collateral, you can file a lien with your state's department of motor vehicles (DMV).
An auto lender can take your vehicle from you if you don't meet the requirements of your auto loan. This process is known as vehicle repossession .
Someone may become a creditor if he or she wins a lawsuit against you. When a creditor can't immediately collect, the individual may have the right to file a lien against property you own. This lien ensures that you will eventually pay the damages when you can't immediately pay out of pocket.
Mechanic's and Construction Liens
Contractors who are performing work on your property expect that you will pay them. If you don't pay your contractors, these workers can file a mechanic's lien with your local municipality recorder's office. Mechanic's liens may also be filed if a contractor does not pay subcontractors.
Your local government or the IRS may collect unpaid taxes with liens. Taxing authorities may attach liens to both current and future assets. Tax authorities can also collect from bank accounts before other creditors can. In fact, the IRS usually has the right to collect before your other lenders. Bankruptcy doesn't always discharge unpaid taxes either.
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Outcomes to a Loan That Includes a Lien
When you buy a product through financing, you consent to a lien. A lien on a vehicle loan is an example. The vehicle is the collateral in this case.
If you buy your vehicle from a dealer and secure it with a loan from your bank, the bank will put a lien on the vehicle and hold the title. This action gives the lender — your bank, in this example — a security interest in your property. The lender keeps ownership of the vehicle. If you default on your loan, or fail to pay, the lender may sell your vehicle to recover the amount of your loan.
When you take out a loan that includes a lien, you'll have one of three outcomes:
- You make all payments and pay off the loan . In the example of the vehicle, your bank would release the title, and the lien would be removed.
- You stop making payments . Continuing with the vehicle loan example, the bank would hold the title of the vehicle until someone purchases it. This action would release the original lien, and the lien would no longer exist.
- You try to sell the property while you still owe money to the lender . In the case of the auto loan, your bank would still hold the title to the vehicle. As a result, you would need to pay off your bank to release the lien and obtain the title to sell the vehicle.
How Do Liens Benefit a Creditor?
Liens provide certain benefits to a creditor, whether they are currently lending you something or they are considering lending to you in the future.
- Current lenders : If you don't repay your debt, a lien may give the current creditor the legal right to take possession of your property and sell your property.
- Potential lenders : If you want to get a new loan, a potential creditor will see that existing claims are connected with your property since liens are public records.
Current Lenders and Creditors
If you're promising to repay a lender, a lien provides added security. For example, when you're buying a home, a lender doesn't have much leverage if you stop making payments on your house. The lender can file certain documents with your local government to become a lienholder for your property, thus securing the debt and making it more likely that you will repay the loan.
Potential Future Lenders and Creditors
Existing debts need to be paid first. A potential new lender will know that you will need to take care of a lien before you can pay back your lender. A lien, therefore, can make selling a property before clearing up the lien difficult if almost impossible. Liens will also usually prevent you from selling or refinancing the property, such as a home or automobile, unless you pay off outstanding debts as part of the process.
Release of Lien
If you want to sell property you own , you would need to get a release of lien against it. You will have difficulty selling property unless you resolve requirements of the lien to release it.
Generally, a lien can only be released by the organization or person who created it. However, some actions you can take may release the lien including the following:
- Paying off the lien
- Settling the lien
- Correcting the lien
- Disputing the lien
Paying Off the Lien
If a lien is legitimate, your only option may be to pay off your debts. Liens may be removed when a home or financed vehicle is sold.
Settling the Lien
If you don't have enough money to pay off your debt, you can attempt to negotiate the lien. Sometimes creditors are willing to accept less than the full amount you owe to get some funds immediately and not worry about the loan any longer.
Correcting the Lien
In some cases, a lien may not be legitimate. Contact the lienholder if you believe this situation is the case for you. A lien release could possibly be lost or forgotten.
An example of when this scenario might occur is when buying a used vehicle from someone who previously had an auto loan. The lien release might not be detected in this transaction. If you bring up the issue with the correct person, calling attention to the lien might be all you need to do to resolve the lien.
Disputing the Lien
You may need to bring legal action in case of a disagreement against the lienholder to have a lien released. You can investigate whether claims are still valid. Liens may expire after several years.
If you have questions about a lien, consult with an attorney to clarify your situation.
Meet some of our Lien Lawyers
Attorney (FL, LA, MD) | Commercial Real Estate Attorney and previous Closing Manager (Driving Growth from $10M to $50M+/month).
John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.
Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.
Attorney of 6 years with experience evaluating and drafting contracts, formation document, and policies and procedures in multiple industries. Expanded to estate planning last year.
George is a lifelong Houston resident. He graduated from St. Thomas High School and then Texas A&M University. He obtained his Doctor of Jurisprudence from South Texas College of Law in 2007. He is experienced in real estate, estate planning & probate, civil/commercial matters, personal, injury, business matters, bankruptcy, general counsel on-demand, and litigation. He is active in the community serving as past-president of the St. Thomas Alumni Board, a current member of the Dads Club Aquatic Center Board of Directors, current member of the Dickinson Little Italy Festival of Galveston County Board of Directors, and former PTO President for Briarmeadow Charter School.
My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling (before you need a litigator). I've seen a lot, and because I run my own business, I understand the concerns that keep you up at night. I’ve been through, both on my own and through other clients, the “teething” pains that will inevitably arise as you scale-up – and I’m here to help you. I have over 20 years international experience devising and implementing robust corporate legal strategies and governance for large multinationals. I now focus on start-ups and early/medium stage technology companies to enable a sound legal foundation for your successful business operations. Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Regularly, I handle early stage financings including Convertible Notes, Seed and Series A/B financings; commercial and technology contracts; international transactions; tax; mergers and acquisitions.