A lien is a security interest held by a lender or service provider on an individual’s property, effectively turning the property into collateral pending payment of the outstanding amount owed. A lien may be consensually applied to property, as is often the case with mortgages (especially second mortgages) and “mechanic’s liens” related to financing property improvements.
A lien may also be non-consensually imposed, frequently by tax authorities to secure the payment of taxes and penalties owed or by the courts to secure the payment of amounts handed down in a judgment. Although there are many types of liens, all of which have different effects, most liens have three primary effects.
The first, and most important, effect is to create the possibility of the creditor or service provider taking control of the property if certain conditions are met. Unlike most Common Law jurisdictions, in the United States a lien generally does not result in the creditor taking actual possession of the property, but it can under certain circumstances. These circumstances vary by the type of lien in question, but the ultimate point is to give the person owed money a secure interest in the property. Some, though not all, liens are also exempt from being discharged even through bankruptcy proceedings.
The second most common effect is related to the first, it makes it difficult – or even impossible – for the property owner to sell or otherwise transfer ownership of the property to someone else. As the lien gives the person owed a solid interest in the property, the official owner loses the ability to independently transfer the property under a lien to another party. Further, most buyers of property or lenders that use property as collateral are unwilling to acquire an interest in property that is already under a lien. This means that the person owing the money is essentially “stuck” with his obligations.
A third effect, that can have a lasting impact on the individual, is that a lien usually has a severe impact on the individual’s credit rating. This primarily applies to involuntary liens and is effectively treated as an unpaid obligation. One large lien can significantly reduce an individual’s credit score almost immediately. However, if the person owing the money pays off the amount due (with any additional penalties, fees, and interest), a lien release can be obtained which turns the matter into one of credit history as opposed to current outstanding debt. Like other negative factors affecting a person’s credit rating, a lien usually remains on the record for seven years.
Having a non-consensual lien placed against one’s property can be a real problem and should be avoided if at all possible. Because most U.S. states have their own laws related to liens, many of which make it extremely easy to file a non-consensual lien on someone else’s property, these devices have frequently been abused. Despite this abuse, a lien can still be a nightmare for property owners. It is strongly advised to be wary of liens and to take threats of having them imposed very seriously.
Wendy Polisi is the founder of Finance the Dream which offers Rent to Own Homes and Lease Options throughout the United States. Their unique HomeFinder program can help you find a home, regardless of where you life. To find out more about how they can help you get into your dream home, please visit them at financethedream.com. To learn more about Improving Credit Score, please visit her blog.
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