A lien is a tool to help you build wealth and credit. But, it's also a sign of bad debts. Understanding what it is (and how it work) is good for your financial health.
A lien is a claim against a property or asset. It's a notice of a debt owed or a loan that hasn't been repaid. It's also a court judgment. A lien is a matter of public record, so a future lender or landlord can see your outstanding debts.
When a creditor puts a lien on your properties or assets, those properties and assets become collateral for the debt. Creditors can take one out on many types of assets, including homes, cars, motorcycles and boats.
You can't sell or refinance these assets without a clear title. To clear a property's title, you have to pay off the lien. If you can't, a lienholder has the right to take possession of the asset and becomes the legal owner.
A lienholder (or lienholders) is a private individual, company, federal or state agency, bank or financial institution. They are the lender or the recipient of your payments and have an interest in the property until the loan is repaid. Find their information in the loan contract, on your state's DMV website or with your local tax assessor or county clerk's office.
The liens listed above are property liens. A mortgage is the most common example of a property lien. It's also a voluntary one, which means the homeowner signs a document agreeing to the terms of a loan. As long as they make the monthly mortgage payments on time, the home will be theirs when the mortgage term is up. But, if they don't, the bank can foreclose and repossess the house.
Since you're renting, you won't have to worry about a mortgage unless you have an investment property or a second home. But, others may apply to you. Liens against vehicles like cars, trucks, boats, motorcycles and ATVs are very common. But, a creditor can apply one to almost any asset, including appliances, furniture and valuable art.
If you forget to (or refuse to) pay your income taxes, the IRS can put a lien on your property. It can then employ a levy to repay the debt.
"An IRS levy permits the legal seizure of your property to satisfy a tax debt," explains the IRS website. "It can garnish wages, take money from your bank or another financial account, seize and sell your vehicle(s), real estate and other personal property. Levies are different from liens. A lien is a legal claim against your property to secure payment of your tax debt, while a levy actually takes the property to satisfy the tax debt."
The state can also take out liens for nonpayment of taxes. These are involuntary. That means the person who owes money didn't sign up for them. They're being applied against their will because of nonpayment.
If a building owner doesn't pay property taxes, the government can take one out against a piece of property. If property tax liens aren't reimbursed, the government can order a sale of the property to pay back taxes, interest and fees.
A property tax lien can influence renters if the owner of their home hasn't paid their taxes. If your building is in foreclosure, The Consumer Financial Protection Bureau advises you to take action quickly, to check state and local tenant protection laws and to contact an attorney.
If you owe child support, don't ignore the notices to pay up. The Office of Child Support Enforcement explains they use many tactics to secure payment. These include taking a lien on a debtor's property, levying financial accounts or withholding tax refunds.
Judgment liens apply to the losers of a lawsuit. If you're sued and you lose, you need to pay the winner of the lawsuit. If you don't, a judge can order one against your assets.
Liens are public records, so they'll appear on your credit report. This is possibly very damaging to your credit score. If you owe other creditors money or you haven't paid it off, the score will be much lower. The older it is, the less impact it will have on your credit score. Take steps to grow your credit score as you deal with your lien payments.
Your insurance bill might also increase. An insurance company might insist you carry full coverage instead of liability coverage until your loan is repaid.
Many landlords and property owners use credit scores as a way to determine which renters are at low financial risk. So, if your credit report shows a lien or other negative credit activity, you might not meet the rental requirements and will have to find another apartment. Renting with bad credit is a challenge. You may need to rent from an apartment that doesn't run credit checks or work on improving your credit.
Create a payment plan and pay off outstanding liens as soon as possible. This shows creditors and landlords that you're working hard to overcome financial mistakes in your past. But, a release or waiver might not make it disappear from your credit report. Tax liens stay on the report for up to seven years after you pay it off. The statute of limitations for other types of liens varies widely.
Voluntary liens can build your credit and improve your financial health. But, an involuntary one can damage your credit, hurt your finances and impact your ability to rent the apartment you want in the future.