Suppose your business is behind on payments. You know someone has placed a lien on your business, but you don’t know what type. There are three different kinds of liens. A UCC lien is from your bank or from another lender that has given you a loan. A judgment lien results from a lawsuit that someone has won against you. A tax lien is the IRS’s way of saying, “You haven’t paid your taxes.” They sound alike but they are different. Each one has different roots and they have different rules about who gets paid first. What the word “lien” actually means is that a creditor has a claim on your property to enforce payment of a debt. If there is more than one creditor with a claim on the same property, who wins depends on priority. And who wins that fight between the IRS and your other creditors can determine whether you can stay in business, keep your personal assets safe, negotiate a settlement or prepare for bankruptcy.
Consensual Liens
Start with the UCC lien. It is a security interest, given by agreement, where somebody actually put up cash (or credit in some other form) to finance the transaction. The kind of mortgage you have on your house is one kind of security interest, for example. That’s why they’re often called consensual liens - the consent is your signature on the loan agreement. The rule is that the first one in time is first in right. If it was perfected before the IRS files its notice of tax lien, it will have priority over the IRS.
The next one, the judgment lien, you get without asking for it. A judgment lien doesn’t come from a contract, but from a lawsuit. Two things must happen for a judgment to become a lien on property. First, the court must actually make a judgment for a certain sum of money against a person. Second, the judgment must be properly perfected on the property. In Maryland, for instance, you have to record the judgment for it to be a lien. Who gets there first? A judgment creditor only beats the IRS on a piece of property if the judgment creditor’s lien was established before the date the IRS filed notice of its tax lien. If the court entered the judgment before the IRS filed notice of its tax lien, but the judgment creditor did not record the judgment until after the IRS filed notice of its tax lien, the judgment creditor loses.
The tax lien is different again: a nonconsensual lien is not created by the consent of the debtor or by contract. It is instead created by operation of law. The federal government has a sneaky lien that you have to be very careful of. It affects all your property, and the rights to any property, everywhere you own it. It is automatically there as soon as your bill is assessed, notice is sent, and demand for payment is made. Often they won’t file any public notice until much later, leaving lenders unaware of the lien. Once it is in place, it defeats most other claimants to your property.
The First Creditor to File Gets First Priority
As a general rule, the first creditor to file gets first priority. But this is the tax code, so be careful. And in some instances the IRS can lose to a creditor who never even had a lien filed. There are some exceptions, however, called ”superpriorities.” Even after the IRS files a notice against you, customers who buy inventory from your store in the regular course of business are still protected, and you can continue to sell off your existing goods to them. Similarly, if you sell your car to someone who doesn’t actually know about the lien, they are still protected.
Lenders that provide financing for accounts receivable or inventory, and that made the agreements involved in the normal course of business, may have limited priority over a filed tax lien. But this works only for money that is lent before the forty-sixth day after the IRS has filed its notice, or before the lender actually learns of the filing, if that is sooner. This right to priority is narrow in scope and short in duration.
What does an owner with three liens do? Negotiate? Try to settle? File for bankruptcy? That is the point where a business debt settlement company like Delancey Street comes in. Our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell you another loan.
A Few Ways Out from Under It
If the IRS lien is already on file, there are a few ways out from under it:
- a release, in which the lien is totally gone (note that the IRS has to do this within 30 days if you have paid the debt in full or it is legally unenforceable);
- a discharge, in which the lien is removed from a specific piece of property — for example, property you are selling; or
- a subordination, in which the IRS agrees to let another lender take precedence over them, e.g. if you are refinancing to help them collect.
There is something you can ask for that is called a withdrawal of the notice. It’s not a complete removal of the lien, just the public part of it; the underlying lien remains. The IRS may withdraw the notice if the filing was made too early, if you’re in an installment agreement that covers the whole debt, or if the withdrawal would help them collect. The IRS can even tell the credit reporting agencies about the withdrawal. That matters, because often what the owners really fear is that public notice. We are not a law firm, though. When tax work, litigation or bankruptcy is the right call, we refer owners to a vetted independent attorney.
There are three types of liens: contract liens, which come from an agreement; legal judgment liens, from a lawsuit; and tax liens, from the IRS. The tax lien beats most other claimants, but not always, and the IRS can release, discharge, subordinate, or withdraw its notice. Knowing what kind of lien you have and the order of priority can be crucial when you are deciding how to move forward. If you are weighing whether to negotiate, settle or file, a first consultation with us is free and confidential, and if a cheaper option exists, we will tell you on the first call.
