What Is a Lien and How Does It Affect Your Property?
A lien gives creditors a legal claim on your property to secure debt repayment. Voluntary liens arise from agreements like mortgages, statutory liens happen automatically for taxes or repairs, and judgment liens result from lawsuits. Chapter 7 bankruptcy can eliminate or reduce many liens, especially judgment liens when no non-exempt equity exists.
Get Free ConsultationA lien is a legal claim a creditor holds on your property. It secures their right to payment from you. Creditors use liens to make sure they get paid what you owe. Liens often attach to houses, cars, and other valuable assets. If you don’t pay the debt, the creditor can take and sell the property. Once you pay off the debt, the lien disappears. You then own the property free and clear.
Understanding liens helps you protect your assets. You’ll learn how they work and what options you have.
Eliminate Judgment Liens Through Chapter 7 Bankruptcy
Many liens can be avoided or eliminated in Chapter 7 bankruptcy, especially judgment liens when no non-exempt equity exists. Find out if you qualify for a fresh start and protect your property from creditor claims.
Check If You QualifyThe Three Main Types of Liens
Creditors obtain liens in three different ways. You can voluntarily grant one during a purchase. Some liens arise automatically under state or federal law. Others result from court judgments when you don’t pay debts.
Each type works differently and carries unique consequences for you.
Voluntary Liens You Agree To
You create voluntary liens when you borrow money to buy something. The lender takes a security interest in what you’re purchasing. These are called consensual liens because you agree to them.
Purchase Money Security Interests
A purchase money security interest (PMSI) happens when you finance a purchase. Car loans and mortgages are common examples. The lender holds the car or house as collateral.
If you stop making payments, they can repossess your car. With a mortgage, the lender can foreclose on your home. You’ll lose possession after foreclosure proceedings complete.
Non-Purchase Money Liens
You can also use property you already own as collateral. A non-PMSI lien uses fully paid assets to secure new loans. For example, you could borrow against a car you own outright.
A non-possessory lien means you keep the collateral. A possessory lien (like a pawn) means the lender holds it. Different state laws govern each type.
Why Consensual Liens Matter
Voluntary liens receive special treatment in bankruptcy. You can’t escape them by claiming exemptions. The law honors agreements you voluntarily made with creditors.
These liens take priority over bankruptcy exemptions. You gave the creditor rights to the property. Courts enforce those rights even in bankruptcy.
Statutory Liens That Arise Automatically
Statutory liens attach without your agreement. State or federal law creates them automatically. You don’t sign anything or consent to them.
Common examples include mechanic’s liens, homeowner association liens, and tax liens. The lien appears as soon as you owe the debt.
How Tax Liens Work
Federal tax liens arise when the IRS assesses your tax debt. The IRS sends you a notice of federal tax lien. They record it at your county recording office.
Tax liens attach to all your property. The IRS must approve any asset sales you make. Buyers pay the IRS from the sale proceeds.
Tax problems often affect independent contractors and small business owners. Earned income credit issues also trigger tax liens. Business owners may face trust fund recovery penalties. These penalties make you personally liable for corporate tax debts.
Property-Specific Statutory Liens
Different statutory liens attach to different property types. A mechanic’s lien attaches only to the repaired vehicle. Property tax liens attach to your home or land.
Homeowner association liens also attach to real property. Tax liens cast a wider net. They cover all assets you own.
Judgment Liens From Court Decisions
Judgment liens arise when creditors sue you and win. These are involuntary liens. You didn’t agree to them.
The creditor may be voluntary or involuntary. Voluntary creditors loaned you money under a contract. Involuntary creditors won lawsuits based on torts, like car accidents.
Courts issue judgments in both cases. The judgment becomes a lien once recorded properly.
Recording and Enforcing Judgment Liens
Creditors record judgments at county recording offices. Recording creates an enforceable lien against property buyers. The lien attaches to all your real and personal property.
Creditors don’t need to record judgments to garnish wages. Wage garnishment follows different rules in each state.
How to Discover Liens on Your Property
You need a title search to find liens on real estate. County recorder’s offices maintain these records. Different states use different names for these offices.
Some call them probate records or register of deeds. Others use terms like chancery clerk’s recording office. Every county has one under some name.
Title Searches for Real Estate
Title insurance companies require title searches before sales. The searcher examines county records for any claims. Tax liens, judgment liens, and other interests may appear.
You must pay off lienholders before selling. Often, the lienholder receives payment from sale proceeds. The buyer won’t complete the purchase with liens attached.
Checking Vehicle Liens
Your car’s title shows any existing liens. Some states let you enter the VIN number online. The system reveals whether liens exist on the vehicle.
Car liens prevent you from selling with clear title. Buyers need assurance they’ll own the vehicle outright.
How Liens Work in Chapter 7 Bankruptcy
Chapter 7 bankruptcy affects different lien types in various ways. You have options for dealing with secured debts.
Surrendering Collateral
You can surrender collateral for PMSI and non-PMSI liens. Bankruptcy surrender differs from regular repossession. Outside bankruptcy, lenders sell repossessed cars at auction.
If the auction price doesn’t cover your debt, lenders sue you. They want the deficiency balance. Bankruptcy eliminates this risk.
Your discharge wipes out liability for deficiency balances. You walk away owing nothing after surrendering the collateral.
Keeping Collateral Through Reaffirmation
You can keep collateral by reaffirming the debt. Reaffirmation treats the secured debt as if bankruptcy never happened. You remain liable for the full amount.
Courts scrutinize reaffirmation agreements carefully. You must prove you can afford the payments. Judges protect you from unwise financial decisions.
Avoiding Judgment Liens
Many liens can be avoided in bankruptcy. Avoid means eliminated or reduced. Judgment liens get eliminated when no non-exempt equity exists.
If you have zero non-exempt equity, the judgment lien disappears completely. With $100 of non-exempt equity, the lien reduces to $100. The rest gets eliminated.
A motion to avoid judgment liens protects your property. Speak with a bankruptcy attorney for free to explore your options. They’ll determine which liens you can eliminate.
Protecting Your Assets From Liens
Liens threaten your property ownership. Understanding how they work helps you respond effectively. Voluntary liens require careful consideration before you agree.
Statutory liens demand quick action when they arise. Judgment liens may be avoidable through bankruptcy. Each situation requires a tailored approach.
Professional guidance makes a significant difference. Attorneys understand the nuances of lien law. They help you navigate complex rules and protect your interests.