Lien

Lien summary:

• A lien is a legal claim on property or assets to fulfill a debt obligation.

• Liens are a standard part of many loan contracts and often give the lender the right to repossess the collateral on the loan.

• When you pay off the debt, the lender must remove the lien. This usually happens automatically.

Lien Definition and Meaning

A lien gives a creditor the right to a financial stake in your property or assets if you fail to pay a debt. Liens are standard with loans that have collateral, such as mortgages, and provide protection for the lender. Courts and government entities can also establish liens if someone hasn’t met their financial obligations.

How Liens Work

Liens are either voluntary or involuntary. A voluntary lien is one you accept as part of a financial contract. Lenders often use voluntary liens for protection, and this type of lien generally isn’t anything to worry about.

For example, if you get a mortgage, you have to agree to a voluntary lien on the home you buy. If you don’t repay your mortgage, the lender could foreclose on your home and sell it. The lien gives the mortgage lender the right to foreclose on and sell the home if you default on your mortgage. As long as you make your mortgage payments, the lien doesn’t come into play. Auto loans are another type of loan that requires a voluntary lien.

An involuntary lien is established by a court or government entity without your consent. For example, if a creditor wins a judgment against you, the court may place a lien on your property so the creditor can collect on the debt.

Types of Liens

There are many types of liens, including:

• Bank liens: A voluntary lien that gives a bank the right to collateral on a debt. If you get a loan from a bank to purchase an asset, such as a home or car, that asset will likely have a lien on it.

• Real estate liens: A voluntary lien on real estate property. The most well-known example is a mortgage. When you get a home equity loan or home equity line of credit (HELOCs), the lender will also put a lien on your home.

• Mechanic’s liens: An involuntary lien on property that’s established by a court for non-payment of services rendered. This type of lien is also known as a construction lien. Contractors and materials suppliers may seek out a mechanic’s lien if a homeowner doesn’t pay an invoice. 

• Judgment liens: An involuntary lien established by a court for an unpaid debt. The court can place a lien on the debtor’s property or assets in this situation.

• Tax liens: An involuntary lien for failure to pay federal or state taxes. The IRS or a state tax board can establish a tax lien on the debtor’s property or assets.

• Child support liens: An involuntary lien for failure to pay court-ordered child support. The court can establish a lien on the parent’s property or assets until that parent catches up on payments or the other parent cancels the lien.

How to Remove a Lien

You can remove a lien by paying off the debt. For example, if you have a mortgage, the lender removes the lien after you’ve paid off your mortgage. Remember that you don’t always need to rush to pay off a debt just because of a lien. With loans, you can make your regular payments to get the loan paid off and the lien removed on schedule.

If you have an involuntary lien, try to repay your debt as quickly as possible or look into debt relief options. You could also work with the creditor to create a payment plan. This type of lien should be a priority to avoid the possibility of the creditor repossessing your property or assets.