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Know What Property Lien Is and Its Consequences

Aparna Iyer Aug 21, 2020
Property lien or a lien on property is a publicly recorded claim that has a number of unfavorable consequences for the encumbered.
A lien by definition, gives the lienholder the right to retain lawful possession of the property of the encumbered until the latter fulfills some legal obligation, viz., discharging payment that is due for work done on the property, repaying unpaid mortgage loans, car loans, or taxes due to the government.

What does it mean?

A creditor, who would like to collect the amount that is due, may do so by filing a case in a court, winning a judgment, and registering the same with the land records office in any county in which the debtor owns real estate. This is same as placing a lien on property (real property) owned by the latter.
To file a lien on property for the evasion of taxes, the Federal government assesses the extent of debt, and dispatches a Notice of Demand informing the debtor about the extent of unpaid taxes. Refusal to pay up within 10 days of receiving the Notice of Demand, results in the IRS filing a Notice of Federal Tax Lien.

How to Put a Lien on Property?

Contractors and mechanics have the right to place a lien on real property for money, that is yet to be paid for services rendered or materials provided for making improvements on the property. This can be done by filing a form with the recorder's office.
It may also be placed for unpaid child support. The non-custodial parent may be forced to refinance the property or sell it in lieu of unpaid child support. A
foreclosure may be completed outside the judicial system, assuming the presence of a power of sale clause in the mortgage deed.
In most states, a mortgage creates a lien on property title. Foreclosure of that lien requires the lender to file a law suit with the court showing proof of default. Judicial intervention thus becomes necessary for seeking remedial measures in the event of default.

What are its Consequences?

For the Encumbered

Liens on property have to be removed if the property owner desires a clear title. Although, a clear title is not necessary for selling the property, the potential buyer would have to contend with liens and settle the same. Hence, they may deter potential buyers.
The encumbered may try to settle the dues by refinancing the property. However, creditors may be unwilling to refinance, since their claim will be subordinate to the claim of the lienholder. A mortgage is a common lien on property. Credit score or credit history does not get impacted because of a common lien.
However, the same for unpaid taxes and child support, contractors' and mechanics' claims, and judgment liens impact the credit rating of the encumbered, since these are publicly recorded claims against property. Thus, the encumbered may find it difficult to get a loan, or sign up for a credit card, or to avail insurance.

For the Lienholder

Creditors often choose to collect a judgment through liens, since it is inexpensive and less cumbersome. However, this strategy may not always yield results. For instance, a homeowner's primary residence may be already mortgaged.
In this case, the creditor's claim becomes subordinate to the mortgage owner's claim. In the event of selling the house, the mortgage owner would have to be paid before the creditor's dues can be settled. A debtor may choose to file bankruptcy, and this may result in clearing the liens.
It's evident that a lien against property has a number of repercussions for both debtors and creditors. Debtors should try and repay debts by consolidating debts, or by adopting other measures as deemed appropriate. Creditor's should also try and explore other avenues before placing a lien.