A lien is a claim on someone's property that can often enable the lien holder to force the sale of the property to collect money that is owed. Liens are commonly used in mortgages and auto loans, and they can also be placed on property by workers if bills aren't paid. The government can also put liens on property for unpaid taxes.
All liens are designed to be placed on property. A few of the different types include mechanic's liens, tax liens, warehouseman's liens, innkeeper's liens and accountant's liens.
Types of Lien on Property
It's common for liens to be placed on residential property and other real estate. In many states, a mortgage lender places a mortgage lien on a property that enables the company to foreclose on the property and take possession of it or force it to be auctioned off if the borrower stops paying his or her mortgage bills. The property is considered collateral for the mortgage loan, which enables people to borrow for long periods of time since banks know that in the worst case, they can foreclose on the property to collect the money they are owed.
If you fail to pay a contractor for work on your home, they can also put a lien on your property in order to help collect. This is called a mechanic's lien, and most states have regulations on how they can be placed and what efforts the contractor must take to notify you before doing so. It's possible to have a mechanic's lien placed on your property by a subcontractor if he or she is not paid by the primary contractor. You can avoid this by paying subcontractors directly or by getting subcontractors to sign a lien waiver, pledging not to issue such a lien.
If you fail to pay your taxes, you can also find a tax lien placed on your property by the government. Tax liens don't have to stem from property taxes, and the federal Internal Revenue Service and state tax agencies can put a lien on your property for unpaid income tax as well. A similar concept is called a levy, where the government actually seizes your property, whether it's real estate or money in the bank, to pay for back taxes.
If you lose a court case, and especially if you do not pay what you are ordered to pay, you can potentially find a judge putting a lien on your property on behalf of the person or organization that sued you. This is typically referred to as a judgment lien.
Liens on Personal Property
Liens aren't limited to real estate. Other types of liens include warehouseman's liens, which let warehouses and storage facilities place claims on merchandise stored in their facilities for unpaid bills. If you fail to pay your storage bill for long enough, the contents of the storage unit can potentially be auctioned off to pay the bill.
Hotel owners have a similar tool called an innkeeper's lien, or sometimes hotelkeeper's lien, which lets them hold on to property that you have in the hotel if you fail to pay your bill.
If you hire someone to take care of your animals and fail to pay them, they can put what's called an agister's lien on the animal and ultimately sell the creature at auction. Some states also allow them to put liens on equipment and goods that are with the animal, such as horse's saddles.
Even accountants may have the right to put liens, naturally called accountant's liens, on your books and records that they've prepared if you fail to pay them. Exactly what rights the accountant has to hold your books depends on the jurisdiction.
Perfected and Unperfected Liens
In some cases, legal paperwork needs to be filed for various types of lien. Once the appropriate documents have been filed, and it's been confirmed there are no prior liens against the property, the lien is said to be perfected. Liens related to business loans often need to be filed with the state's Secretary of State or a similar official, and liens related to real estate normally need to be recorded with a city or county property records office, along with other documents related to property ownership such as deeds.
A lien that is not perfected is called unperfected. Generally, lien holders with perfected liens have legal priority over unperfected liens if there are multiple liens on a piece of property. This means, for example, that mortgage lenders, who usually record their liens as a property is bought, usually have priority over liens placed by contractors who later did work on the property.
Liens and Deeds
When you purchase real estate, you normally receive a document called a deed that records the transfer of title to the land from the previous owner to you. This document must be recorded and stored at your local public land records office, where it's available for public inspection so that people can determine who owns the property. Nowadays, they're often also made available online.
There are multiple types of deeds used in land purchase deals. One common type is a warranty deed, sometimes abbreviated on forms as deed type WR or WD, which includes a guarantee from the previous owner that nobody else has any undisclosed interest in the property, including organizations holding liens or other owners still holding on to some rights to the land. A warranty deed doesn't provide any warranty about the condition of the land or the building on it. It simply guarantees that the title is clean.
Another type of deed called a special warranty deed offers a more limited guarantee: it pledges that nobody has gained undisclosed rights to the property, including by placing liens, during the time the seller owned it. It doesn't make any guarantees about what may have happened under previous owners.
A quitclaim deed makes no guarantees about the property's ownership at all. It simply transfers all of one person's rights to the property to another person. It's often used by relatives who are transferring assets within a family and other relatively informal situations.
Removing a Lien
Liens don't have to last forever. For instance, once you pay off a mortgage on your house, the financial institution that issued it doesn't get to keep a lien on your property. Similarly, if you pay your debt to your contractor or settle your hotel bill, the contractor or hotel owner can't keep a lien on your assets.
Depending on the type of lien, you may need to file formal paperwork to remove the lien from your property. With certain types of lien, such as a mortgage lien, the organization holding the lien may be required to do so itself when the lien is no longer valid. Mortgage lien removals, sometimes called releases of mortgage, are usually filed at the same records office where your mortgage lien and deed are held.
Certain liens only last a limited amount of time unless action is taken to enforce them. For example, contractors often must sue you within a certain amount of time to enforce a mechanic's lien.
If you think that a lien was illegally applied, you can go to court to ask a judge to invalidate it. You may also need to file paperwork recording that judgment depending on the nature of the lien.
- FindLaw: What Is a Mortgage Lien?
- FindLaw: Understanding Mechanic's Liens
- IRS: Understanding a Federal Tax Lien
- Wolters Kluwer: Different Lien Types Provide Creditors with Different Rights
- US Legal: Warehouseman's Lien Law and Legal Definition
- US Legal: Innkeeper's Lien Law and Legal Definition
- Stable Management: Stable Owners: Learn Your Lien Laws
- US Legal: Accountant's Lien Law and Legal Definition
- Warranty deed - Wikipedia
- The Warren Group: Records Search Deed Code Definitions
- Difference Between a General Warranty Deed and a Special Warranty Deed | Rocket Lawyer
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sep. 18, 2020.
- Experian. "Tax Liens Are No Longer a Part of Credit Reports." Accessed Sept. 18, 2020.
- Experian. "What Affects Your Credit Scores?" Accessed Sep. 18, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act 15 U.S.C § 1681," Page 22. Accessed Sep. 18, 2020.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.