What Is a Property Lien?

Types of Property Liens

When discussing property liens, it is helpful to note that liens can be categorized as general or specific and voluntary or involuntary.

Specific Lien

A specific lien attaches to a particular asset owned by a debtor.

For example, a lien on a home is a specific lien on a particular asset.

Should the borrower not make the required payments, the remedy available to the creditor cannot exceed the value of the specific asset.

General Lien

If a lien attaches to every asset in the borrower's possession, it is classified as a general lien.

A general lien affects a borrower's bank account, cars, house, and personal property.

For example, a general lien can result from an IRS tax lien on unpaid income taxes owed to the federal government. 

Voluntary Lien

The most common voluntary lien is a mortgage on a property.

If a property owner voluntarily agrees to have a lien attached to his or her property, that lien is considered voluntary.

The property owner voluntarily grants the lender a security interest in the property. 

They sign a deed of trust or a mortgage to create security for the loan.

The lender records the mortgage at the county recorder's office and, by doing so, places a lien on the property.

The lien gives the lender the legal right to foreclose on the property if the borrower does not perform according to the loan terms.

Involuntary Lien

Liens placed on a property without the owner's consent are considered involuntary.

Unlike voluntary liens, involuntary liens are placed on an individual's property without their permission.

Involuntary liens fall into one of two categories: 

• Those that are attached to an individual's property by rule of law 
• Those that are attached as the result of a court judgment

Rule of Law Liens

With regard to liens that attach to property as a result of the rule of law, they include; 

• Liens by the Internal Revenue Service
• Liens placed by various state taxing authorities 
• Property tax liens

If an individual fails to pay income taxes to the IRS despite being given sufficient written notice, the agency can place a lien on the individual's property.

The IRS resorts to such a measure when the delinquent taxpayer is unemployed or self-employed, and income garnishment is difficult.

If the amount owed is substantial, the IRS may force a sale of the property.

Otherwise, it will wait until the taxpayer sells or refinances the property, in which case it will be automatically paid.

State government taxing authorities have the power to act like the IRS.

Property Tax Lien

Property tax liens occur when the property owner fails to pay their property taxes.

After following the procedures mandated by individual state laws, the state can force the sale of a property to satisfy a delinquent tax bill.

After the sale, the owner may be able to claim their property provided the taxes and any costs are paid.

Also, if the property has a mortgage, the lender will usually satisfy the tax bill to protect the mortgage.

The amount paid will then be added to the mortgage balance.

Besides property taxes, homeowners belonging to a homeowners association are responsible for dues.

Failure to pay dues can result in a lien being placed on the property according to the association's covenants, codes, and restrictions.

Court Judgement Liens

Liens that attach to property as the result of a lawsuit include;

• Child support liens
• Spousal support liens
• Mechanics liens
• Liens resulting from unpaid credit card debt
• Medical bills 
• Personal loans

Failure to pay child and/or spousal support can lead to a lawsuit against the obligated individual.

If the party filing the lawsuit prevails and is awarded a monetary judgment, they can place a lien on the losing party's property.

The lien will remain attached to the property until it is sold, refinanced, or the prevailing party forces a lien sale.

In California, in an action for alimony, a spouse can recover attorney’s fees by placing a lien on the community property portion of the real estate owned jointly by both parties.

Whenever someone fails to pay a personal loan, credit card debt, or large medical bills, they may face possible legal action from unsecured creditors.

The unsecured creditor must first file a lawsuit to place a lien on an individual property.

Upon prevailing in court and receiving a monetary judgment, the creditor can place a judgment or lien on the property the debtor owns.

In some states, creditors are allowed to place a lien on someone's personal property and real estate.

Mechanic’s Lien

Any discussion of liens must include one that most people are familiar with: the mechanic’s lien.

If an individual hires someone to perform major work on their home, such as installing a swimming pool or building an addition, and they are not compensated for their work, they can file a mechanic’s lien on the property. 

In most states, the contractor must record the lien within one to six months. 

Once the lien has been recorded, depending on state law, the contractor has anywhere from one month to six years to file a lawsuit against the property owner.

If the contractor prevails in court, they may be able to force the sale of the property.

Every state has established expiration dates for mechanic’s liens.

The mechanic's lien expires if the contractor fails to file a lawsuit within the proper time frame.

Any claim not enforced before the deadline established by the state is no longer valid.

Even if an individual has paid their general contractor in full, the general contractor may not have paid one more subcontractor.

The property owner may not even be aware of these subcontractors.  

Even though the property owner might not be at fault, those subcontractors are entitled to file mechanic’s liens against the property. 

Lien Waivers 

To alleviate such problems with contractors and subcontractors, lien waivers are advisable.

Whenever a contractor or a subcontractor receives payment for services rendered, they should execute a lien waiver in the sum of the payment.

In other words, the contractor or subcontractor waives an equal amount of lien rights in exchange for payment.

Lien waivers represent evidence of payment and provide satisfaction that a lien will not be claimed for amounts previously paid in the future.

Lien Priority

Oftentimes, if a property has a lien attached to it, there will be other liens as well.

In what order liens are paid off involves a concept known as lien priority. 

Lien priority determines the order in which lien holders are paid.

A lien is paid off before another lien if it has priority.

Generally speaking, the order in which liens are recorded determines their priority.

This practice adheres to the rule of law as "first in time, first in line."

However, there are exceptions to the rule.  

Subject to individual state laws, with regard to property, some liens have priority over previously recorded liens.

As a general rule, priority of payment depends on two factors: 

• The type of lien 
• When the lien was filed

In most cases, tax liens will be given first priority, followed by mortgage liens, while other liens will be paid in the order of their ranking.

In the event there are a number of mechanic’s liens, priority is established by one of two ways: equal priority or first to file.

The equal priority rule is followed by a number of states.

It provides for "relating" to when a project was started.

Claimants share the available proceeds based on each one's percentage of the total legal claims.

Property owners attempting to remove liens should consider the following:

• To dispose of a mortgage lien or a tax lien, there is no magic remedy other than paying what is due.
• When that happens, the lien holder must remove the lien within a specified time period or face a penalty.
• The lien holder must file a lien release form or a lien cancellation form with the recorder's office where the lien was originally filed.

With regard to the removal of the mechanic's liens, the property owner has a choice of remedies.

One choice is to pay the amount claimed.

However, suppose the property owner doubts the validity of the lien.

In that case, the county recorder will not provide assistance; the recorder does not judge whether or not a lien is valid.

If the claimant fails to commence the enforcement process within the allowable time frame, the lien loses its validity.

Notice of Contest

Some states allow the property owner to file a Notice of Contest.

Once the lien holder receives the Notice of Contest, they must enforce their claim within 60 days.

If the claim lacks validity, the lien holder will unlikely attempt to enforce it.

Another option for the property owner is to gather evidence and wait for the claimant to file an enforcement lawsuit.

Once in court, the property owner's evidence may result in a rejection of the claim, and they may be reimbursed for his legal fees and court costs.

Bonding Off a Lien

Lastly, a property owner can discharge a lien by doing what is known as "bonding off a lien."

Bonding off a lien allows a property owner to remove it by replacing it with a surety bond.

The surety bond becomes the collateral for the debt, in effect, replacing the property.

The claim still exists.

However the property owner is free to sell or refinance and attend to the lien separately.