It’s exhilarating to finally close on the home of your dreams and make it your own. However, this excitement can quickly turn sour when the threat of foreclosure appears six years later from something as simple as unpaid taxes.
A D.C. homeowner fell victim to this due to a delay in the municipal recording that their standard title search missed. Had they performed a municipal lien search, they might have uncovered this before closing on their property.
Title searches and municipal lien searches provide valuable information to avoid surprise liens in the homebuying process, but it’s also beneficial to understand what a lien is, when a lien is created, and how it can affect homebuyers and homeowners.
What is a lien?
A lien is an interest or claim to a piece of property or possession to secure payment of a debt. Liens act as a layer of security to a creditor, service provider, or lender, giving them a method to take legal action if needed.
General Liens vs. Specific Liens
General
A general lien is attached to all of a person’s assets, such as a car, a piece of land, a property, a boat, etc. The creditor can lay claim to one or more assets – anything considered valuable enough to cover the debts.
In the opening scene of the popular series Schitt’s Creek, the Rose family home is inundated with government agents seizing their property because of a federal tax lien. Later realizing a shifty business manager had defrauded the father’s video company, never paid the taxes, and absconded with the funds, they were left with almost nothing except for a town purchased as a joke that the government saw no value in – Schitt’s Creek.
Specific
On the other hand, specific liens attach to one particular asset. Frequently, this will be a home or a car since financing is typically used to purchase these items.
Voluntary vs. Non-Consensual (Involuntary) Liens
Voluntary
Not all liens are a surprise. As the name suggests, voluntary liens are placed on assets with the full knowledge of the borrower. In the case of a mortgage, it essentially acts as a security deposit or form of collateral for the lender.
For other purchases like cars, boats, and RVs, missed payments on the loan will result in repossession or a lien if the vehicle’s value doesn’t cover the remaining payments, plus interest.
Involuntary (Non-Consensual)
Involuntary liens are more dangerous because borrowers can be unaware that the liens have been placed against them. A creditor can obtain a lien without your agreement and swoop in to collect on the unpaid balance.
Involuntary liens are created in two different manners:
- by the courts
- by preexisting statutory laws
When a lien is created due to court action, it’s called a judicial lien, while those formed from a law are called statutory liens.
Statutory Liens
There are many different types of statutory liens that a homeowner or borrower may encounter, and it’s essential to understand your state’s laws.
Tax Liens
Local, state, and federal laws allow for liens to be placed on a property when attempting to secure unpaid taxes. The state and local laws vary, so it’s best to consult an attorney who can advise you if you’re facing a tax lien. At the federal level, the liens will be general, meaning they link to all of the person’s assets.
When a homeowner fails to pay their property taxes, local taxing authorities will place a lien on the specific property. The tax lien may be sold at auction as a tax lien certificate. In some areas, a Tax Suit may be filed, resulting in a settlement to repay the delinquent taxes via an installment plan, bankruptcy, foreclosure, or tax sale.
Shockingly, even owing small amounts can lead to foreclosure. A man in Washington D.C. lost his home to an investor in a tax sale because he owed just $134 in property taxes but couldn’t manage the tacked on fees, legal costs, and delinquencies that mounted up.
Mechanic’s Liens
Jay-Z and Beyoncé were hit with a mechanic’s lien when they didn’t cough up the cash for the construction of their fourth pool.
Mechanic’s liens, also known as a contractor’s lien, construction lien, or supplier’s lien, are formed when someone is not paid for the work or supplies provided for a home improvement job. Regardless of who hired the contractor, the homeowner is seen as the benefactor of the work, so these liens always attach to the property.
HOA or COA Liens
Community associations offer attractive amenities and services to homeowners who are members. Services such as snow removal, landscaping, maintenance, and amenities like pools, parks, and gyms may be offered, but you should be prepared for the fees and community rules that come along with it.
A Homeowner’s Association (HOA) lien or Condominium Owner’s Association (COA) lien results from outstanding dues or fines.
Homeowners who don’t abide by the rules, even the ones that may seem arbitrary or petty, can be threatened with a lien and foreclosure. One man was fined for planting pansies in the community’s park. When he refused to pay the ridiculous fees for his attempt to improve the park, the HOA then placed a lien on his property.
Judicial Liens
A judicial lien is any type of lien created as a result of a court proceeding or missed payments stemming from a previous court order.
Judgment Liens
If a creditor wins a lawsuit against you, a judgment lien is placed on your assets to ensure you will pay off the debt. This could be attached to any of the debtor’s real property, and in some states, it may also attach to personal property like jewelry, art, antiques, and other valuables.
Child Support Liens
A parent who has not paid their child support for an extended period may be served with a court-ordered lien. The lien is typically imposed on property located within the state where the missed court-ordered payments are due. The custodial parent might recoup the money owed by forcing the sale of the property.
How Creditors Come to Collect
Regardless of the type of lien, a creditor wants to recoup the money owed to them. Depending on the type of lien, state laws, and if previous attempts to collect have already been made, this process could happen much quicker than you’d anticipate.
- Before a lien is placed on the property, a service provider, contractor, lender, or any other entity with a right to lien will sometimes make attempts to collect on the debt.
- Be aware that the attempts might have occurred before you took ownership of a home, so you may not know that a party is seeking payment.
- If the requests to settle the debt go unanswered, the creditor will take the next steps to officially record the lien or file a suit. They may not start this process until months or years later.
- The creditor must then file a claim of lien in the county recorder’s office or clerk of court, depending on the state and lien. In the case of judicial liens, a lawsuit is filed, and court proceedings must first occur.
- The official recording of the lien may be delayed in the municipal offices, meaning if you were to search for it, it might not be found in the public record yet.
Some liens do expire, but many do not. What’s even more concerning is that if a lien is not extinguished, it can stay tied to a piece of property, even a car, after being foreclosed on or repossessed. The debts must be paid off completely, and the lienholder must release the lien in the public record.
How Liens are Extinguished
The easiest way to remove a lien is to pay the debt. However, if you feel the lien was created in error or don’t have the ability to pay right away, there are some options.
Appeal or Dispute the Lien
Disputing a lien isn’t an easy task, but it is an option through legal action. Winning an appeal against a lienholder requires either proving that the evidence presented is not valid or that they did not comply with state-specific requirements.
Negotiation
Some creditors may be willing to reach a settlement to lower the amount owed or create a manageable payment plan.
Statute of Limitations
For judicial liens, a debtor can wait for the lien to expire as a way to avoid paying, but the creditor will likely have the option to file a lawsuit again.
Lien Payoff
If the lien is indeed your responsibility, you can request a payoff letter to satisfy the debts. Once you’ve made payment with the creditor, you can take proof of this to the local recorder or recording jurisdiction’s office to have the lien released.
Buying a home or any other piece of property is less stressful when you take the time to do your research and look for potential issues before they arise. Fortunately, you’ll have professionals like title agents conducting a proper title search, but it never hurts to learn more about the different types of liens that affect homebuyer and homeowners.
Ask your title agent to tack on a municipal lien search (and estoppel if moving into an HOA), and you’ll feel confident in closing on a property. Title insurance will protect you when the proper searches are conducted beforehand, not after. Take the appropriate steps in the process, and be rest assured that you’ll be owning your home for many years to come.
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