A lien is a legal claim on property that secures debt repayment, affecting ownership and financial flexibility. Unpaid liens can complicate sales, refinancing, and creditworthiness, requiring resolution before transferring property rights.
By Brad Nakase, Attorney
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When a creditor asserts a claim against your property, they attach a notice to it, known as a “lien,” which informs everyone that you owe them money. Real estate is a common target for liens. However, in certain circumstances, they may also affix to personal property. These documents are usually kept in a public record and can be found in the records office of the county where the property is located or in the secretary of state’s office for vessels, mobile homes, office equipment, and similar items.
Creditors often use liens as a means of collecting debts. Liens transform your property into collateral for debts owed to other parties. Having clear title is essential in order to sell or refinance the property. When you have a lien on your home, vehicle, or other property, it makes it hard to tell who owns what. Paying off the lien is necessary to clear the title.
Creditors know that a lien is a cheap and almost certain way to get their money—somehow—in the future.
You are essentially promising the lender that they can get their money back in the event that you don’t pay back the loan by pledging your property as collateral. The legal claim known as a lien facilitates this process for creditors.
Voluntary and involuntary liens are the two most common kinds.
A mortgage or auto loan is an example of a voluntary lien because the borrower knowingly and voluntarily agrees to the terms of the loan. If you take out a mortgage, for instance, the lender can keep your house as collateral until you pay off the loan in full. A mortgage lien serves as a legal claim and is discharged upon repayment of the debt.
In contrast, third parties can place involuntary claims against your assets even if you didn’t sign a document authorizing such claims. If you don’t pay off your debts as agreed upon, the court may impose an involuntary lien on your assets, giving creditors the legal right to seize your home if you don’t.
With the exception of the fact that involuntary liens are considered to be derogatory because they are the result of non-payment, voluntary liens accomplish essentially the same thing. An inevitable consequence of taking out a loan is the creation of a voluntary lien, which serves as a legal mechanism for the collection of a debt in the event of default.
Payout for one lien will precede payment for another lien if the one with “priority” is better. Foreclosure payment priorities are based on lien priority.
The order of recording a lien is typically relevant, according to the principle of “first in time, first in right” in law. The “first in time, first in right” rule does not apply in every case, however.
Among the liens that can take precedence over earlier recorded liens in real estate are those pertaining to property taxes, mechanic’s liens, and, in certain cases, assessment liens from homeowners’ associations and condominiums. But this varies from state to state.
There may be more than one lien on a property, especially a home. The homeowner has the option to place a “voluntary” lien on their property, which is the case with certain types of liens like mortgage liens.
A lien does not necessarily require the approval of all creditors. Without your consent, certain creditors can acquire such rights. “Involuntary” liens include those from property taxes, judgments, income taxes, mechanics liens, homeowners’ associations, and others.
1. Mortgage Liens
Before approving a homebuyer loan, a lender will check the property’s title to ensure it is free and clear. A mortgage, deed of trust, or similar document will be required if the property has clear title in order to secure the debt.
Lenders typically place liens on property by recording mortgages, sometimes known as “first mortgages,” in public land records. The second lender will record their loan and get a second lien on the property if you take out another loan, like a home equity line of credit, from another lender.
2. Association Liens for Homeowners
Many homeowner associations (HOAs) have the right to place a lien on a homeowner whose dues go unpaid for an extended period of time. The Declaration of Covenants, Conditions, and Restrictions or state law dictates that, in most cases, a first mortgage takes precedence over a homeowner association lien.
Having said that, a super-lien statute in your state might make a homeowner’s association lien stronger than a mortgage lien.
3. Tax Liens on Real Estate
No matter how late a property tax lien was filed, it will typically supersede any other mortgages or liens against the same property. The government can sell your property to pay the taxes if you don’t pay them. Following the state’s prescribed procedure, the government may offer you the chance to repay the taxes and costs and reclaim your property, even following the sale.
A tax sale could result in the loss of interest in the property for both you and the lender due to the superiority of property tax liens over all other types of liens, including mortgage liens. Lenders typically pay taxes on your behalf and include the money in your mortgage debt if you fail to do so.
4. Judgment Liens
It is common practice to record a “judgment lien” against your property when a party wins a lawsuit you were involved in, creating an involuntary lien.
Credit card companies, medical bill collectors, and personal loan holders are examples of unsecured creditors who typically need to initiate legal action, secure a monetary judgment, and then obtain lien rights. Depending on your state of residence, a judgment creditor can attach a judgment lien to your personal property as well as your real estate once they have the judgment in their possession.
Homeowners who owe unpaid federal income taxes run the risk of having their property seized by the IRS. Homeowners who owe more than $5,000 to the federal government may face foreclosure proceedings initiated by the IRS. The IRS, however, does not often opt to foreclose. It is more likely that the Internal Revenue Service will receive payment if you successfully sell or refinance the home, or if your mortgage lender forecloses on the property because you have failed to make the required loan payments.
1. Federal income tax liens and how they are obtained by the IRS
A federal tax lien is a legal document that automatically attaches to any asset—real estate, personal belongings, money—if you fail to pay your federal income taxes. When you do not pay the debt in full and on time after the IRS has assessed your liability, sent you a notice, and demanded payment, a lien will be created.
2. Tax lien notice for the public
At the outset, the existence of an IRS lien is not public knowledge. A “Notice of Federal Tax Lien” is a public document that the IRS may file in the county records. The Internal Revenue Service will not verify your ownership of the property before recording the lien notice. You might own a home someday, even if you don’t have one now.
A lien’s total value will incorporate all accrued costs, interest, penalties, and overdue taxes. Notices of Federal Tax Lien reveal financial obligations to the Internal Revenue Service (IRS), similar to recorded mortgages or deeds of trust that notify anyone searching public records of a homeowner’s debt. The Internal Revenue Service (IRS) may notify you of its intention to file a Notice of Federal Tax Lien, but you retain the right to appeal.
3. How likely is it that the IRS will initiate foreclosure proceedings?
In order for the IRS to contemplate foreclosure, there must be an adequate amount of equity in your home to cover both the IRS debt and any prior recorded mortgages or other superior liens. The IRS still typically does not forcibly remove homeowners from their principal residence, even in such cases. The media portrays this practice negatively.
To reiterate, the IRS will usually just hold onto the house lien until you sell it or refinance it. At closing, the money from the sale would go toward paying off the federal tax lien. You have two options when it comes to refinancing: either borrow enough money to cover the lien’s cost, or request that the IRS move its lien behind the lender’s lien so you can refinance your mortgage.
Contractors who you hire to do major renovations to your home, such as installing a new roof, may be able to place a mechanic’s lien on your property in the event that you fail to pay them for their services. Compared to a first-lien mortgage, this lien might be better in some cases.
Typically, in order to settle a lien, creditors can foreclose and sell the property. Except in the case of mortgage and property tax liens, they almost never do this.
Upon foreclosure of a junior lien, the property that was subject to the lien (such as a mortgage or tax lien) usually goes to the creditor. As a result, creditors typically wait for the property to sell before imposing a foreclosure sale. Once again, if there are any liens on the property, buyers will likely not buy it. So, to settle any outstanding liens, the seller will deduct a portion of the purchase price.
Liens are no longer reported to credit bureaus as of 2018. When you have a lien on your property or a loan from a bank, the loan will still show up on your credit report.
Following an investigation by the Consumer Financial Protection Bureau that found problems with the accurate reporting of civil judgments and tax liens, the three major national credit bureaus (Experian, TransUnion, and Equifax) removed such records from credit reports.
For the time being, only bankruptcies are visible on credit reports. For seven years following the filing date, credit reports will reflect a Chapter 13 bankruptcy; for ten years following the filing date, records of a Chapter 7 bankruptcy will remain on reports.
The removal of a lien from your property occurs upon payment of the lien. The lender or creditor may take the asset or property to pay off the debt if you don’t pay the lien. A lender may foreclose and sell your property if you fail to pay a mortgage lien, for instance. If there are enough funds from the sale to cover the liens, then the lienholders will get their money back.
Foreclosures involving liens other than mortgages are uncommon but not impossible. Lienholders typically do not get their money until you sell or refinance the house, after which the creditor who filed the lien will typically get their full amount.
The remaining creditors can pursue the remaining balances if the proceeds from the foreclosure are not enough to cover all debts. Additionally, the debtor may be able to transfer the liens to other properties that they own now or in the future.
Your credit may take a hit if you have an unpaid lien, even though the lien itself won’t show up on your report. This is because lenders report payment histories to the credit bureaus. As a result, your credit report may reflect a default. Never forget that 90% of the best lenders base their decisions on your FICO Score, which is 35% of your total creditworthiness. The single most important component in this score is your payment history.
Keep in mind that liens may still show up in public records even though they don’t appear on your credit report. You may find it more difficult to get new credit if lenders find public records of unpaid liens.
In most cases, you can discharge a lien on your house, vehicle, or other property in one of these ways:
Missed payments do show up on credit reports, but liens don’t. Your credit score and payment history can take a hit from these missed payments. Make a habit of paying your bills on time to strengthen your credit. Keeping a low credit utilization ratio (the amount of credit you’re using in relation to your available credit) accounts for 30% of your credit score, so it’s wise to avoid carrying large balances.
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