How do liens work, from filing one on a nonpaying client to getting one released?

A lien is a legal claim against your property that’s designed to make sure a debt gets repaid. It gives the person you owe the right to take your property if you don’t pay the debt. If you don’t pay a lien on your home or a car, you can lose the house, the car or both.

You’ve put a ton of work into your business. The last thing you want to hear is that you’re facing a lien. Below, we’ll walk through what they are, the different types, how to file and remove them and more.

Let’s get started.

Typically a lien is the result of a debt you owe. Liens most often get used for real estate, residential or commercial, or automobiles.

When it comes to cars, lenders can put liens on vehicles. If you don’t pay the loan, the lender can use the lien to repossess the car. With homes, lenders can use a mortgage lien to take your house if you don’t pay your mortgage.

A lienholder doesn’t want to take the property, not usually. It just wants to get paid for what’s owed. And putting a lien on your home makes it a lot harder to sell, which scares off most buyers. If it sells, they get their cut of the proceeds. As an example, let’s say you hired a contractor who finished the job, but you still owe them. They can file a lien on your house.

Liens are serious business, especially for a small business owner like you. A lien on your company’s property can have big consequences for your financial future.

For you, two main reasons kick in for taking the time to understand liens.

Don’t be surprised if your small-business loan comes with a lien attached. Business lenders often use them, too, to protect their interests. They usually ask you to accept a UCC lien, which is pretty much the standard in business financing. That said, read the fine print, and make sure you understand what you’re agreeing to.

You might need a lien to collect from a client, too. Imagine you own a construction company and a client blows off paying the final bill for an upscale kitchen redo. To protect yourself, you can file a mechanic’s lien on the property.

Types of Liens

Liens aren’t all the same. The type of lien matters and may affect what you can do to get out of it. Most fall into two main types, voluntary and involuntary.

A voluntary lien is a claim someone has against your property that you agree to. For example, a home buyer taking on a mortgage agrees to a lien. When you’re applying for a business loan, you’ll likely face the prospect of agreeing to a UCC lien as part of the application process.

With an involuntary lien, you didn’t agree to a creditor putting a lien on your property, whether it’s your business or your home. Now let’s look at some of the common types of liens.

• Car lien: A legal claim over a car, truck, motorcycle or other motor vehicle. The most common type of car lien comes with a car loan, but a title loan can create one too.
• Electronic lien: Part of a paperless lien and title system some DMVs use. Instead of paperwork, lienholders and lenders move titles and lien documents online.
• Equitable lien: It’s one a court can impose when a property owner got or kept property unfairly, so that others can get their fair share. They’re rare and a little complicated, so talk to an attorney if you think it applies to you.
• House lien: Any lien that uses your home as collateral. These include a mortgage lien, a mechanic’s lien (your home is repaired or renovated, but you don’t pay) and a judgment lien (you didn’t pay a court judgment, and it got attached to your house).
• Judgment lien: A legal claim that comes from a court judgment. It can attach to a home, vehicle or any other asset you have. It’s typically the court’s way to help out the party that was awarded damages.
• Mechanic’s lien: Also called a “contractor’s lien” or “construction lien,” it’s a property lien. It’s usually placed on a property by contractors or subcontractors who didn’t get paid for their work.
• Mortgage lien: A very common type of lien, this attaches to a home whenever a mortgage is used to buy or refinance it. The lender gets a lien against the property.
• Property lien: An umbrella term that means a personal property lien. It also can refer to a real property lien, such as on land or real estate.
• Statutory lien: A lien placed under a specific law when its conditions are met. Tax liens are the most common, levied against people who owe large back taxes.
• Tax lien: This is a statutory lien for unpaid taxes. If you don’t pay your taxes, the Internal Revenue Service or your local government can tack a lien on your property.
• UCC (Uniform Commercial Code) lien: A business lien that gives the lienholder priority over other creditors if you default or you file for business bankruptcy. Typically, a UCC lien is valid for five years and can be renewed. With a blanket UCC lien, the creditor has a claim to all business assets, not just specific property.

Even if a loan lacks “collateral,” meaning property that you pledge to back up the loan, it usually comes with a UCC lien anyway. That may sound bad, but it’s actually a good thing. It’s what lets many owners without collateral get approved when they’d otherwise be turned down.

Getting a Lien Off a Property

You want a lien removed ASAP, and we don’t blame you. Here’s how you can do it.

The solution’s usually pretty straightforward: pay off the debt behind it. Follow the payment schedule on a business loan, pay your contractors right away and so on.

One thing you might try: Negotiate with the lienholder to see whether they’ll agree to a lower payoff that you can afford. Sometimes, the lienholder can be talked into a settlement, and after you settle the lien can be released. It won’t happen if you don’t ask, so take a shot.

Maybe a lien was filed in error. It happens, and you can either work it out with the lienholder or challenge it in court.

So what about bankruptcy? It typically wipes out the underlying debt, but the creditor may still be able to take the collateral. Bankruptcy is serious stuff, so ask a bankruptcy attorney if it makes sense for you.

Put a Lien on Their Home

Bad clients happen to even the best small business owners and freelancers. Too often you’re chasing your client for the bill on a just-finished project. To nudge them along, it can help to put a lien on their home. Here’s a broad outline of the steps in the process (every state has its own laws).

• Check your state’s lien laws to be sure you’re in the clear.
• Give the debtor notice that you intend to file a lien against their property.
• Get or prepare the correct form.
• File the form with the court or government agency where the lien must be filed.
• Serve the debtors with the lien.
• Enforce the lien by collecting the debt if necessary.

The above is a big-picture view, and it may not apply everywhere or for every lien. States have different lien laws, and it varies by type of lien. Be sure to get all the details.

It’s tempting to go for the form you can download online, but strongly consider hiring an attorney for the job. It could turn out your lien is invalid. Or you could miss an important requirement, such as the date when the lien expires and must be renewed.

We hope we helped you understand more about liens, but if your situation is complicated it pays to get help. A solid lawyer may be your best bet.

Good luck out there.