What Is a Lien and How Does It Work?—What Small Businesses Should Know
A lien is a legal claim or right to a piece of property, and it’s used to guarantee payment of a debt. Liens can be filed on real estate, vehicles, and other kinds of property. If you don’t pay back your debt, your creditor, or lienholder, can take the property they’ve filed a lien on.
Sound a little scary? We get it. Which is why we’re going to break down what all of that means for you. We’ll explain more about what a lien is, what types of liens exist, how to get rid of a lien, and how a lien gets filed.
Let’s learn about liens.
We’re happy to give you some essential information on liens, but you should know that lien laws vary depending on your state. Plus, liens can get complicated, and the stakes are often pretty high. In other words, if you have worries about a specific lien, you should consult a lawyer. Seriously.
What is a lien?
Like we said above, a lien is a legal right to a piece of property. In many cases, that property is a house, building, or other piece of personal or commercial real estate. But creditors can also file liens on other types of property, like cars and other vehicles.
Now, a lien gives your lienholder the ability to seize the specified property if you don’t repay your debts. And in some cases, they will. For example, if your lender repossesses the car you stopped making payments on, that’s them using their lien to rightfully seize your property.
Lienholders don’t always want to actually seize your property, though—they mostly want to get paid. So if a contract puts a lien on your house because you owe them money, there’s a chance they won’t try to take your house. Instead, that lien will make it difficult to sell your house. (It’s a big red flag for buyers.) And if you do sell it, your lienholder gets to take their share of the profits.
As you can see, you need to take liens seriously. They can have big, big financial consequences—especially if you’re a small-business owner.
Why liens matter to business owners
There are two big reasons that business owners care about liens.
First, business owners often have to agree to a lien as part of getting a small-business loan. In most cases, this is a UCC lien (which we define below) to secure your loan. While UCC liens are a standard practice in business financing, you do want to make sure you understand what you’re agreeing to.
The other reason business owners care? Well, some businesses may have to place liens on customers who won’t pay. If you own a kitchen remodeling business, for example, you may have to place a lien on the house of a homeowner who refuses to pay up. Liens can be an important way to make sure you get the money you deserve.
We’ll spend most of this article explaining how liens work from the perspective of someone who wants to know more about the lien being placed on their property. But if you’re more interested in filing a lien and getting paid, you can skip ahead to where we talk about that.
What kinds of liens are there?
Before we get into the nitty-gritty of the various types of liens out there, we need to acknowledge that there are two basic categories of liens: voluntary liens and involuntary liens.
A voluntary lien is any lien that you knowingly and willingly agree to. For example, when you get a loan for your house, you’re agreeing to an automatic lien from your mortgage lender. Likewise, many small-business loans require you to agree to a UCC lien (which we’ll get to in just a minute).
An involuntary lien is a lien that you don’t agree to. If, say, you don’t pay contractors for work on your house, they may file a lien on your house without your consent. Statutory liens, or liens that get placed automatically because of laws (like tax liens), also fall under this category.
Now that you know the difference between voluntary and involuntary liens, let’s dive into all the types of liens you might encounter.
Many liens don’t last indefinitely. They’ll expire, unless the lienholder renews them. You’ll have to check local laws to find out how long each type of lien lasts in your area.
Types of liens
Car lien: A car lien most commonly refers to a lien from financing a car purchase, but it can refer to any lien on your car (such as a lien from taking out a title loan).
Electronic lien: This term is usually seen as part of “electronic lien and title,” which is basically just a paperless system that a state DMV (department of motor vehicles) may now use. Electronic liens and titles allow lenders and lienholders to transfer documents like titles and liens via the internet, rather than requiring paper copies of everything.
Equitable lien: If a property owner has acquired or held property through unfair means, the courts might place an equitable lien to ensure that other parties get their fair share. (Honestly, this type of lien is relatively uncommon and complicated, and you should definitely be talking to an attorney if you need to know about this one.)
House lien: A house lien can refer to any lien on your house. This can include the typical mortgage lien from buying a house, but it can also refer to a mechanic’s lien, a judgment lien, or any other lien that uses your house as collateral.
Judgment lien: Judgment liens get placed as a result of a legal judgment or court ruling. Generally, this happens when one party gets awarded money as part of a ruling, but the other party can’t pay immediately. A judgment lien can be a house lien, car lien, or other type of lien.
Mechanic’s lien: A mechanics lien is a type of property lien, usually filed by contractors or subcontractors who haven’t received payment for their work.
Mortgage lien: This is the common type of lien that’s placed on your house when you take out a mortgage to buy or refinance a house.
Property lien: This sometimes refers to personal property liens, which can include liens on houses, cars, other vehicles and equipment, etc. Other times, this is used to refer to real property liens, or liens on real estate.
Statutory lien: A lien counts as a statutory lien if it gets placed because of specific laws or statutes. In other words, the law will say that if certain conditions are met (like you owe a bunch of back taxes), someone can automatically place a lien on your property. Tax liens are the most common type of statutory lien.
Tax lien: A tax lien is a type of statutory lien on property, and it gets placed when you owe money on your taxes. These can come from both the federal government (via the IRS) and your local government.
UCC lien: A UCC (Uniform Commercial Code) lien is a special type of lien for business transactions. UCC liens give the lienholder priority over other creditors. So if you default on your loan or declare bankruptcy, they’re more likely to get paid. UCC liens last for only five years, unless the lienholder renews them. Note that UCC liens can be filed against specific property or as a blanket lien on business assets.
Even if you get a loan without offering specific collateral, you’ll probably still have to guarantee the loan with a UCC lien. That might make you a little nervous, but think of it this way: UCC liens make it possible for many business owners who don’t have collateral to qualify for business loans. Without a UCC lien, they’d probably just get turned down altogether.
Want more options? Fund your business with a personal loan.
How do you get a lien released?
So you have a lien and you don’t want it (who would?). How do you get rid of it?
The first—and usually best—way to get a lien released is to simply pay the associated debt. So if you have a lien thanks to your business loan, just pay off your loan in the agreed-upon repayment term. If you’ve got a home lien because of unpaid debts to contractors, pay those debts ASAP.
Some types of liens will automatically get released when certain conditions are met (usually the full payment of debt), but this can vary depending on the type of lien, state laws, etc. So it never hurts to follow up with the lienholder and make sure they release the lien.
Sometimes, though, you might not be able to pay off your full debt. In those cases, you can sometimes negotiate with your lender or lienholder to settle the debt with a lower amount. After settling, you can get the lien released.
If you think that a lien has been placed or not released in error, you can try to correct it with the lienholder or dispute it through the courts.
In most cases, bankruptcy relieves you of your debt—but your lienholder can still collect on collateral. Of course, you should talk with a bankruptcy attorney if you’re considering this route.
How to file a lien
Let’s say you own a small business, and you’ve done some work for clients who never paid up. (Rude!) Now you want to file a lien against their home to make sure you get paid. The steps to file a lien on a house might include the following:
- Make sure you qualify to file a lien (by checking state laws)
- Send notice of your intent to file a lien
- Get/draft the appropriate lien form
- File the lien with the appropriate courts/departments
- Notify/serve debtors with the lien
- Enforce your lien
Notice that we say might. That’s because—and we can’t emphasize this enough—lien laws vary by state and type. And as with all things legal, the details matter. A lot.
So while you might be tempted to just fill out a form online and try to file a DIY lien, we really, really, really recommend you consult with an attorney. Otherwise, there’s a good chance that your lien will be invalid or that you’ll miss important information (like when your lien expires).
It’s better to lawyer up than to make a mistake that could lose you all that money you’re trying to collect.
As a small-business owner, liens can either be a slightly scary threat or a tool you use to get paid. Either way, you need to make sure you understand exactly how your lien works.
We hope this guide was a good introduction to liens. And as we’ve said, we encourage you to take any further questions to a lawyer.
Good luck with your lien!
Learn more about other types of business loan collateral with our guide to the best unsecured business loans.
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