What is a Lien and How Does It Work?
What Is a Lien
A Lien is a claim of someone on property used by someone else. The person who has the claim can take the property back if the debtor doesn't make payments, or at other times. A mortgage on a building is a type of lien. If you purchase a car or truck for your business, a lien is placed against the value of the asset. Liens are discharged when they are paid off.
If the asset is sold, the liens for those assets must be paid off before the person using the asset can receive his or her money.
In the example of the car or truck, the lender will not release the title until the lien is paid in full. In most cases, you have the use of the property while it is being paid off, but in some cases, the creditor/lender actually holds the property.
How a Lien Works
The most common type of lien is that on a vehicle, so let's look at how a lien works for the purchase of a automobile.
The vehicle is purchased from a dealer, secured by a loan from a bank, and the bank puts a lien on the vehicle and holds the title to the vehicle. A UCC-1 form is filed to record the lien.
The debtor makes payments on the vehicle.
At this point, there are three possible outcomes:
Outcome 1: The debtor makes all payments and pays off the loan. The bank releases the title to the person.
Outcome 2: The debtor stops making payments.
The bank can use the claim on the lien to repossess the vehicle. The bank continues to hold the title.
Outcome 3: The debtor tries to sell the vehicle while still owing money to the bank. The bank still holds the title, so the debtor cannot sell the vehicle until he or she has the title, so must pay off the bank to get the title.
There are several specific types of liens you might encounter.
Consensual liens, which include liens you agree to when you purchase something, as in the vehicle example below.
Statutory or non-consensual liens are obtained by someone through a court process to put a claim on an asset for unpaid bills. The types of statutory liens:
Tax liens: A lien is placed against the property of someone by a federal, state, or local government, for non-payment of taxes.
Contractor's or mechanic's liens: In this case, a contractor does work for a homeowner. The homeowner doesn't pay the contractor, who goes to court to get a lien on the property. If the homeowner tries to sell the property, the contractor's lien must be paid off first, along with the mortgage and any other liens or security interests on the property.
Construction or contractor liens also may be filed against the property owner by sub-contractors who haven't been paid by a contractor. For example, if you have a general contractor doing major renovations on your home, they may hire a plumber. If the contractor doesn't pay the plumber, the plumber can file a lien against your property.
In this case, a court awards a judgment to one party. When the other party doesn't pay, the first party goes back to the court to get a judgment lien against the property.
How to Stop a Lien
A release of lien is a written statement that removes property from threat of lien. It's basically a signed document signed by the contractor that prevents having a lien put against the property. It should be signed at payment as proof of payment and an assurance that the property will not have a judgment against it.
For More Information About Liens
Find out more about lien laws in your state.