What Is a Lien? How It Works and What To Do Next

A lien is a legal right to stake a claim on a debtor's property if payments on the debt are past due. When you take out certain types of loans, like a mortgage or car loan, a lien gives the lender the right to your home or vehicle until the loan is fully repaid. If you don't make your payments, the lender can seize the asset to recover what you owe. You can also face other types of liens if you fall behind on different debt obligations.

In this guide, we'll explain what a lien is, how it works, and what to do if one is placed on your property.

What is a lien?

A lien allows a creditor or lender to claim an asset or property when a debt goes unpaid. It gives them a way to recover the funds they're owed. In most cases, liens are filed with your local county clerk's office.

“A lien is a legal claim placed on an asset such as real estate or a vehicle as collateral for the debt. It gives the right for the lender to take back the asset if the debt isn't repaid,” says Ben Loughery, certified financial planner and owner of Lock Wealth Management.

“A lien means that you don't fully own the asset until the debt is fully cleared. They can hurt your credit score, especially tax liens. On a property, you risk foreclosure or repossession.”

Types of liens

Not all liens are the same. Most are voluntary, but some are involuntary and based on a court order. Some liens are general, meaning they allow creditors to make a claim against any of your assets. Other liens are specific and apply only to a particular property or asset tied to the debt.

Here are some of the most common types of liens:

• Bank lien: If you took out a loan from a bank to pay for an asset such as a car, a bank lien gives them the right to the asset as collateral.
• Mortgage lien: When you use a mortgage to buy a home, the lender usually places a lien on your property. If you stop making your mortgage payments, the lender can foreclose and take ownership of your property.
• Mechanic's liens: A contractor who performed work on your property and wasn't paid for their services could put a mechanic's lien on your property. Mechanic's liens are a type of involuntary, specific lien.
• Federal tax lien: This is an involuntary lien the government can place on your property if you fail to pay taxes owed to the IRS. It gives them a legal claim to your home or other personal property and financial assets until the debt is paid.
• Judgment lien: If a creditor sues you for unpaid debt and wins in court, they may be granted a judgment lien. This type of involuntary lien allows them to place a claim on your property to collect what you owe.

How a lien affects your finances

Voluntary liens on a property or vehicle that you agree to when taking out a mortgage or auto loan won't have any impact on your finances. That's because the borrowing agreement uses your home or car as collateral in the case of nonpayment. As long as you keep up with your payments, you'll be fine. Once your mortgage or auto loan is paid off, the lien will be released.

However, an involuntary lien on any of your assets could be detrimental to your finances and credit score.

“A lien could negatively affect your financial health in the future, such as potentially limiting your loan eligibility, negative impact on your credit score, or even an asset seizure,” says Justin Warren, certified financial planner at Pillar Financial Group.

Liens themselves may not show up on your credit report. However, any missed or late payments that led to the lien can stay on your report for as long as seven years. This can lower your credit score and affect your ability to get approved for loans or secure low interest rates.

Consequences of unpaid liens can vary, but in many cases, you could have your assets seized, wages garnished, and your debt placed in collections. It's important to note that liens don't disappear even if you file for bankruptcy.

How to check if a lien has been placed on your property

You can check the following places to see if you have a property lien:

• Search public records: Check with your local county recorder's office, city register, or Secretary of State. For example, New York City's Automated City Register Information System (ACRIS) lets you search property records online. Some searches are free, but there may be a fee to access certain forms.
• Work with a title company: A title company can do the research for you and provide a report confirming whether there's a lien on your property. This service typically comes with a fee.
• Use online tools: You may be able to use online tools like PropertyShark to search for liens on your property using publicly available data.

How to remove a lien

Once you've identified the type of lien you have, you can take steps to remove it. Here's how to remove a lien:

• Pay your outstanding debt: The quickest and most effective way to remove a lien is to pay your overdue debt associated with the lien.
• Negotiate with creditors: In some cases, you may be able to negotiate with your lender by setting up a payment plan or settling the debt for less than you owe. If you go this route, get the agreement in writing, and request a lien release document for your records.
• Contest an invalid lien: If you believe the lien is invalid or inaccurate, you can contest it in court. You'll need documentation showing you've paid the debt or met your obligations. If the lien involves real estate, you'll likely need a real estate lawyer to help you dispute it.