Have you ever pondered why the bank is so sure you will pay back your auto loan? And why does your mortgage company not bat an eye when you ask them to put up hundreds of thousands of dollars as a down payment on a house?
This is due to their contingency plan consisting of a lien. Unpaid debts may result in a lien being placed on your vehicle, home, or other valuables, depending on the conditions of the loan or debt. The creditor has the legal authority to take and sell the property if they are not paid.
The stakes are usually clear from the start, but not all liens necessitate your approval. The concept of a lien is one of the more straightforward aspects of the law. This is something that every buyer and borrower should do.
What Exactly Is a Lien?
Creditors can use a lien to secure a debt by pledging an interest in an asset you possess. How, in other words, an asset of yours is used as security.
Mortgage loans are a good illustration of this trend. When you take out a mortgage or deed of trust to finance the purchase of a home, you are agreeing to use the property as security for the transaction. By signing, you agree to let the lender place a lien on your property.
If you stop paying payments and the lender has a lien on your property, they are certain to recover part of their money back. Your mortgage lender will likely foreclose and sell your home if you fall behind on payments.
How Lenders Secure Your Loan With Collateral Using a Lien
Creditors obtain the legal right to utilize an asset you possess as collateral when a lien is secured against it. Should you fail to make your loan payments, the collateral will be repossessed and sold to repay the debt.
It is common practice to voluntarily place assets under a lien as security. When you take out a mortgage, car loan, or secured piece of equipment loan, you sign a contract giving the lender the right to place a lien on the collateral you’re putting up as security for the loan.
However, not all liens are imposed without the borrower’s permission. A roofer, for instance, might file a mechanic’s lien on your property if you fail to pay them after they’ve completed a roofing job.
All liens must be satisfied before substantial assets like houses or automobiles can be sold. That covers not just mortgages but also mechanic’s liens and other involuntary debts.
How to Remove a Lien
Repaying your obligation in full is the quickest and most direct route to removing a lien. After receiving payment, the creditor will remove the lien from public records and provide you a copy.
You may try to negotiate a lower debt load, just like you can negotiate any other aspect of your life. If they believe they will get nothing or have to wait years to collect, many creditors may negotiate with you on the balance. For example, if you have debt and are planning to sell your home, you shouldn’t inform your creditors since then they’ll expect to be repaid in full regardless of how much you sell the home for.
An alternative is to challenge the lien in court. This, however, only applies if you have reasonable doubts about the creditor’s legality of the lien they have placed on your property.
If you file for Chapter 7 bankruptcy, most liens will be eliminated. If you’re hoping to get rid of tax liens with the IRS, a bankruptcy won’t do it.
At last, you may sit tight until the line’s expiration date. The statute of limitations on liens varies from state to state; hence, you should verify the applicable statute of limitations in your jurisdiction. Contractors in California, for instance, have a limit of 90 days after filing a mechanic’s lien before they can file a foreclosure lawsuit, however this time can be extended. There is no time limit on the life of a mortgage lien.
Federal judgements expire after 10 years, however creditors can apply to have them renewed once, extending the life of the judgment to 20 years.
Keep in mind that a lien may persist even after death. Any real estate subject to a lien will remain subject to that lien even after the estate sells the property. However, if the estate is bankrupt, some assets may pass to the heirs outside of probate.
Secured debts come with the added benefit of voluntary liens, which can assist you out. You can get a loan at a cheaper interest rate if you pledge an asset as security. As an example, consider the difference between the interest rates on credit cards and HELOCs.
Unpaid tax liens from the Internal Revenue Service and other involuntary liens are always bad news. A creditor can place a lien to your assets if you fail to pay certain payments. Prior to selling any assets, you should think about negotiating a reduced settlement for your liens.
To illustrate, you might offer your creditor a 30% payback immediately, or they could wait 15 years until you sell your property.
This tactic isn’t certain to succeed. However, creditors typically opt to settle for a smaller amount and cancel the account immediately rather than wait for a sale that may take decades.