A lien is a legal term which refers to a right to keep possession of a property that belongs to another person, until that person has paid off a debt that they owe. It is a form of security interest that is placed on an item or property in order secure a debt or a loan, such as a home or automobile loan.
A lender may take the lien and sell it in specific situations where the borrower is unable to make their scheduled loan payment. Additionally, if the debtor sells or refinances a property with a lien attached, the creditor maintains the right to be paid out of the proceeds of the transaction.
There are different types of liens, depending on the specifics of the situation. Most liens arise from a contractual agreement between the borrower and the lender. Generally, before a lien can be placed on a property (i.e., a real estate lien), the creditor must go to court and present evidence of the unpaid debt.
A judgment is received, and if it is granted, the creditor can go ahead and file a lien on real estate by registering the judgment with the land records office. This must be done in the county in which the debtor’s real estate is located.
As previously mentioned, when the owner sells the real estate, any liens on the proceeds will be paid off with the proceeds of the sale. This is done in the order that the claims were perfected, but only after any amounts owed to the mortgage lender are paid first.
As a real estate liens owner, there are a few limitations on your rights:
- If the home or property is foreclosed, it is unlikely that a lien holder will collect on the lien. This is because a foreclosure sale rarely brings in enough money to pay other claims once the mortgage lender has been paid. The mortgage lender is the one who forecloses on the property and must be paid from those proceeds first;
- Most states have a homestead exemption law. This law protects your home and adjoining land from being claimed by creditors, even if you do not have enough assets to satisfy their claims. Homeowners have the right to exempt an amount from being collected of the equity in their home. This means that if you have a lien that is attached to a debtor’s home, you could be limited in your right to their property; and
- In a Chapter Seven Bankruptcy situation, the debtor can utilize a lien avoidance to remove some or all of their debt. Under Chapter Seven, certain types of liens are dischargeable. Essentially, the lien is lifted from the property, with the result that the debtor retains possession of the property in question. If you have a lien on a debtor’s property and they file for a Chapter Seven, your lien may be dischargeable.
Liens on joint property are treated as follows:
- Joint Tenancy: In a joint tenancy situation, two or more people own undivided property shares of real estate. The lien attaches to the debtor’s share of the joint tenancy, which is enforceable if this share is transferred. If the debtor dies, your lien is no longer valid and enforceable. Joint tenancy rules state that a lien attached to a share is extinguished by that debtor’s death;
- Community Property: Community property is also referred to as tenancy by the entirety. A lien attaches to the entire property when it’s held by a married couple. The lien stays attached to the property if it is transferred; and
- Tenancy in Common: In a tenancy in common situation, a lien is attached to the debtor’s interest. The lien remains attached, even when the debtor transfers, or leaves in a will, their ownership to someone else. Thus, the person who inherits from the deceased will also inherit any liens incurred by the deceased.
Before placing a lien on a debtor’s property, you will need to go to the land records office and see if other creditors have placed liens on the same property. While it is possible to collect your money on a property with multiple liens, it is not likely, as debts are paid in the order in which they were incurred. It may be possible that there are already several liens on the property, and you may decide to find another way to collect what is owed to you.
Something else to consider is that a lien does not have to be removed before the property is transferred; this is because the lien simply remains on the property. Therefore, the new property owner becomes responsible for any and all liens on that specific property.
However, if the property buyer demands to receive the property with a clear title, meaning no liens, the debtor would have to first pay off all claims on the property before transferring it.
Debt collections and real estate law can be difficult situations to navigate. There are often several different areas of law at play, as well as differing state laws.
Further, if you do not properly file and record your lien, you risk getting little to no part of what is owed to you. A skilled and knowledgeable real estate attorney can assist you in protecting or exercising your property rights, and will represent you in court if necessary.