A real estate “lien” refers to the right to keep possession of a property that belongs to another person until that person has paid off a debt that they owe. A lien is created when a person uses their land as a security interest or collateral to secure debt or a loan.
For example, John owns a piece of land on the edge of town. When John’s car breaks down and he needs to buy a new one, instead of getting an auto loan, he offers his land to the bank as collateral for a personal loan so he can buy a car the bank makes the loan. The bank does not own the land, and John can still use the land as an owner would, but he cannot sell or transfer it until his loan is paid in full. Sometimes liens will automatically attach to the land, but often the creditor (here, the bank) would have to contact the legal system to go through the process of attaching the lien.
The bank may take and sell the lien if John cannot make his scheduled loan payments. Additionally, if John sells or refinances the property with the lien attached, the bank retains the right to be paid out of the transaction’s proceeds.
There are essentially three different types of lien:
- Consensual: This type of lien occurs when the debtor consents to the lien, such as in a loan or an advancement of a line of credit. Consensual liens can be further broken down into purchase money security interest lien, in which a creditor lends money to the debtor to buy the property in question. The most common example of this type of lien is a mortgage on a home.
- If John takes out a mortgage with the bank, he cannot sell the house until he pays back the mortgage and the bank releases its lien. The other main type of consensual loan is the non-purchase money security interest lien. This is when the debtor puts up a property they own to secure the debt. An example of this would be if John took out a second mortgage on a house he already owned.
- Statutory: Statutory liens are obtained by operating state or federal laws. This means that the lien is authorized by some statute for delinquent payments. Under a statutory lien, the debtor does not consent to the lien. However, the creditor has the legal right to recover the debt regardless of whether they have the debtor’s consent. This type of lien would occur if John failed to pay his taxes.
- Judgment: This is a type of lien in which a creditor can obtain the title to the debtor’s property if the debtor has failed to make a necessary payment when a court orders. Judgment liens, or judicial liens, are typically obtained in connection with the final judgment issued in a lawsuit between the debtor and the creditor.
- If the debtor does not make the required payment, the court will certify the judicial lien, and the debtor will forfeit their property. The property is then put up for sale, and the proceeds will go towards the debt owed to the creditor. Here, if John got into a legal dispute with his neighbor and won a judgment of $20,000, but the neighbor did not pay it, John could put a lien on the neighbor’s house.
What Happens When There Is a Lien On My Property? How Do I Find Out If My Property Has a Lien?
Before a lien can be placed on a property, the creditor must go to court and present evidence of the unpaid debt. The creditor may file a lien on the property if a judgment is granted. This is done by registering the judgment with the county land records office where the property is located. The lien will be displayed on the title records of the house.
Once the lien has been filed, it will specify the amount owed and grants the creditor the right to be paid out if and when the property is sold. The debtor cannot get around the lien and sell the property without paying it off because the lien is shown in the title record.
As previously mentioned, the creditor may take possession of the property under certain circumstances if the debt is not paid off within a specified timeframe. If the debt is not paid, the creditor may decide to foreclose on the property.
To determine whether a lien is placed on your property, you just need to perform a title search (usually, people hire a company to do this for them). A clear title is required before you can sell or refinance your home. As such, it is important to insist that the creditor remove a lien once a debt has been fully satisfied, so you may sell the property when you want.
There are limits on property liens. Most states have a homestead exemption law to protect your home from being claimed by creditors, even if you do not have enough assets to satisfy the creditor’s claim. The main purpose of a homestead exemption is to ensure that a debtor and the debtor’s family can protect the equity interest in their home from being taken by creditors after a declaration of bankruptcy.
How Do You Remove a Lien from Your Property?
Removing a lien from your property can be a complex and drawn-out process. However, you do have a few options:
- Satisfy Your Debt: This is the most straightforward option. Once you have paid off your debt’s balance, you can file a Release of Lien form in full. This is evidence that the debt has been paid and will effectively remove the lien from your property. Each jurisdiction has its own specific requirements regarding the process, so be sure to check with your jurisdiction to ensure you follow the proper protocol
- Obtain a Court Order Removing the Lien: This is an option if the lien was obtained through fraud, coercion, bad faith, or other illegal means. In such cases, you can ask the judge to remove the lien. However, this can be difficult to prove, so it is important to have clear proof of improper behavior
- File for Chapter 7 Bankruptcy: As previously discussed, you can file for bankruptcy to remove the lien. This option is only available to certain liens, such as judicial liens, and may sometimes only be enforceable for a limited amount of time
- Privately Negotiate With the Creditor: If both parties agree, it could be possible to work out a settlement. This can be accomplished through arbitration, mediation, or informal negotiations
- Wait For the Statute of Limitations to Run Out: Your state will have its own law that limits how long a lien is valid and how long a creditor has to file a suit once the debtor defaults. Once this amount of time has passed, the lien can be removed.
Can You Have a Lien on Other Types of Property?
Yes. For example, when a person takes out an auto loan, a lien is created, which gives the lender the right to possession of the vehicle if the loan is not paid according to the monthly payment schedule.
A lienholder may garnish an individual’s wages to have a debt paid off. For example, if a person takes out a vehicle loan for $20,000 but stops making payments after paying off just $2,000, the bank can repossess the vehicle. The bank will next sell the car in an auction. At that point, the debtor owes the bank $8,000: $20,000 minus the amount the debtor already paid ($2,000) minus the amount the bank got for the car in the sale ($10,000). The bank can then go after the original borrower for the debt. They can do so by obtaining a judgment for the remaining amount owed on the debt and then garnishing that person’s wages or even garnishing the person’s bank accounts.
Do I Need a Lawyer for a Lien on My Property?
Consulting with a skilled and knowledgeable foreclosure attorney would be in your best interests if you have a lien on your property and wish to remove it. An experienced foreclosure attorney can help you understand your state’s specific laws regarding property liens and your state’s statute of limitations.
Considering your circumstances, they can review the lien and determine the best course of action. Finally, an attorney can represent you in court and ensure all necessary filings are completed.