What Is a Lien? Types, How They Work & Your Options

A 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.

The 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.

Non-consensual liens work differently. If there's no non-exempt equity for them to attach to, you can eliminate them. But with consensual liens, you can't give a creditor a voluntary security interest and then try to avoid paying by claiming an exemption.

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. These are not consensual liens,they arise by operation of law.

How Tax Liens Work

Federal tax liens arise when the IRS assesses a tax against you. If you fail to pay, the IRS will send you a notice of federal tax lien. They'll record the lien notice in your county recording office and possibly with your state's Secretary of State.

This puts creditors and potential buyers on notice. The lien stays in place until you pay the tax debt in full. Tax liens can complicate selling property or refinancing loans.

Mechanic's Liens and HOA Liens

Mechanic's liens protect contractors and suppliers who work on your property. If you don't pay for the work, they can file a lien against your house. The lien secures their right to payment.

Homeowner association liens work similarly. When you fall behind on HOA dues, the association can file a lien. These liens often take priority over other debts, depending on state law.

Judgment Liens From Court Orders

Judgment liens happen when a creditor sues you and wins. The court enters a judgment against you for the amount you owe. The creditor then records that judgment as a lien on your property.

These are also called non-consensual liens because you didn't agree to them. The creditor forced them through the legal system. Once recorded, the judgment lien attaches to real estate and sometimes personal property.

Judgment liens make it hard to sell or refinance property. You must pay off the lien before the sale can close. In some states, judgment liens also allow creditors to force the sale of your property.

How Liens Affect Chapter 7 Bankruptcy

Filing Chapter 7 bankruptcy can eliminate your personal obligation to pay a debt. But it doesn't automatically remove liens from your property. Liens survive bankruptcy unless you take specific action.

With consensual liens like car loans and mortgages, you have options. You can reaffirm the debt and keep making payments. Or you can surrender the property and walk away. The lien gives the creditor rights that bankruptcy can't erase without your cooperation.

Statutory liens and judgment liens work differently. In some cases, you can ask the bankruptcy court to remove them through lien avoidance. This only works if the lien impairs an exemption you're entitled to claim.

Not every lien qualifies for avoidance. Certain liens,like some tax liens and mechanic's liens,cannot be avoided in bankruptcy. You'll need to pay them off or negotiate a settlement.

What You Can Do About Liens

Start by identifying which liens are on your property. Pull a title report for real estate or check with your county recorder's office. For vehicles, contact your state's motor vehicle department.

Once you know what you're dealing with, evaluate your options. If you want to keep the property, you'll need to pay off the lien eventually. If you don't care about keeping it, surrendering the property might make sense.

In bankruptcy, check your eligibility for lien avoidance. This legal tool can strip certain judgment liens from your property if they interfere with exemptions. An attorney can help you determine if you qualify.

For tax liens, you might negotiate an offer in compromise or payment plan with the IRS. For mechanic's liens and HOA liens, negotiating directly with the creditor often works. They'd rather get paid than force a sale.

Liens complicate your financial life, but they're not permanent. Paying off the debt, negotiating a settlement, or using bankruptcy tools can clear them. The key is understanding which type of lien you're dealing with and what remedies apply to your situation.

Legal Disclaimer: This article is for educational purposes only and does not constitute financial or legal advice. Talk About Debt is not a law firm. Consult a licensed bankruptcy attorney or financial advisor for guidance on your specific situation.