A lien is a security instrument that a lender or service provider can attach to a property. This, in effect, turns the property into collateral until the outstanding loan balance is paid. Consensual liens are applied with a mortgage, and especially second mortgages; a mechanics lien is for funding property improvements.
Liens can be placed non-consensually as well. The courts can do this to secure payment for judgments; liens can be placed by tax authorities for unpaid taxes and penalties. There are many different types of liens to secure property for payments but most of them have three results that are the same.
The most important ramification of placing a lien is the possibility of the creditor gaining control over the property unless payment is made. In the United States this generally means that a creditor will not actually take possession of the property although it could happen. The circumstances under which a creditor could take possession of a property vary with the type of lien placed. The point of placing a lien is to give secure the amount owed to a creditor. A lien is so secure that they often are immune from discharge through bankruptcy.
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.
Another consequence of non-consensual liens is lasting in nature. A lien will usually have a negative effect on a persons credit score. On the credit report the lien is treated as an unpaid debt. Even having just one lien placed can drastically and quickly reduce the credit score of the debtor. If the dollar amount of the lien along with fees, interest and penalty amounts is satisfied then the lien can be released. The lien is then shown as past history instead of a current debt. A lien report will generally show on a credit report for seven years, just like other negatives reported.
Obviously, a non-consensual lien placed on your property is something to be vigorously avoided because it can cause so many problems. Most of the states in the U.S. have created laws regarding liens that make it very easy to place a non-consensual lien. The ease with which liens can be placed mean that all too often this tool has been abused. Whether or not the lien system has been abused, having a lien placed can wreak havoc for property owners. It is wise to take any threat of liens seriously and take necessary steps to avoid it.
Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Credit Repair College empowers people to take control of their financial future by learning everything they need to know to repair credit on their own. For more information on free credit repair please visit them on the web. Finance the Dream offers rent to own homes throughout the United States.