Liens

A lien is the right to hold on to a piece of property. A lender can seize a part of the personal or real property, depending on the case. This is permitted until another party pays a debt. In this way, a lien serves as a form of collateral.

If the debtor does not reimburse the underlying debt, the creditor may hold onto the lien. The lienholder does not have the right to sell the property under normal circumstances. The creditor may only sell the lien if the debtor fails to fulfill its obligations.

Liens are used as a form of collateral by creditors. They protect lenders from bad debts. If a creditor has a lien, they will not lose all of the money they loaned out. This is because they will be able to sell it off in the event of a debtor defaulting.

It's important to note that, without a lien, unscrupulous debtors may be able to use the services of a professional without paying them. For example, homeowners could hire a plumber to fix a leak but never pay them.

Such behavior can lead to many problems. The laborer may not solve this issue themselves if they do not have the homeowner's contact information. While the laborer could make a legal claim against the debtor, it may be more expensive to do so than the job is worth.

As such, laborers having the right to undo work they did not get paid for grants them protection from this kind of exploitation. In addition, liens incentivize debtors to pay back their debts.

In many cases, liens can take the form of specific property, such as a house, a car, or other similar personal property. As a result, debtors have an incentive to settle their debts promptly or risk losing these assets.

There are several different types of liens. Each variety of liens gives creditors rights that help protect them in default. One of the most critical distinctions between different types of liens is the difference between voluntary and involuntary liens.

Voluntary liens are usually part of a more significant agreement that both the creditor and debtor have agreed to. On the other hand, an involuntary lien is placed on a piece of property without the owner's consent.

Some of the most common types of liens include:

Statutory Liens

A legal institution, such as a court, can create a statutory lien without the debtor's consent. Statutory liens come about when the creditor has a financial interest in the outcome of the debt.

Due to this financial stake, the creditor may want their lien to be legally protected. In this circumstance, a court may authorize the creditor to hold a piece of property as collateral. This legally authorized collateral is known as a statutory lien.

There are several different varieties of statutory liens used in other circumstances. Some examples include:

• Tax Lien: These are liens granted to a tax authority, such as the IRS, when the creditor has unpaid taxes that they have not attempted to refinance. The taxpayer has to settle their tax obligations or risk losing the property taken as the lien. Two of the most common tax liens are property taxes and income taxes.
• Mechanic's Lien: Skilled laborers, such as mechanics or suppliers, use these liens to secure payment for services. How the creditor enforces these contracts varies depending on what type of work they do for the debtor. In many cases, if the debtor fails to pay, the lender will have the right to remove the work they have done.

Consensual Liens

Consensual liens are one of the most common types of liens. When compared to a statutory lien, a consensual lien is voluntary. Creditors and debtors agree upon a consensual lien as part of a more comprehensive agreement, such as a loan.

One familiar example of a consensual lien is that of a residential mortgage. In this agreement, the debtor agrees to pay the property owner (usually a bank) a fixed amount every month for an agreed period.

The creditor takes the property as a lien. Should the borrower fail to meet their obligations, they may risk foreclosure on their property.

Another typical example of a consensual lien is a credit card. If a debtor fails to make their repayments, the bank that issued the credit card may have the legal right to take money from the borrower's bank account.

Floating Liens

A floating lien is a specialized lien most frequently used by businesses with large inventory. Floating liens use categories of goods rather than specific goods as collateral.

For example, a supermarket could use recently purchased inventory as collateral for a loan. If they failed to meet their obligations, their lender could take the supermarket's inventory due to possessing a floating lien.

Judgment Liens

One can think of a judgment lien as a type of statutory lien with a few differences. A judgment lien grants a creditor the right to take a piece of property as a lien should a debtor fail to pay off their debts.

However, judgment liens require the specific action of a court. In many cases, the creditor will have to file a lawsuit, and, should they be successful, the judgment lien will be made part of the public record.

The acquisition of the property will have to be reported to the county recorder, for example. Since a court has to get involved, judgment liens are some of the most severe liens and can be detrimental to one's credit score.

Liens can affect an individual's credit score in a variety of ways. While most credit reports do not include liens on them, the presence of liens can point toward several factors that can affect an individual's credit score. Also, creditors view certain types of liens differently.

If an individual possesses a consensual lien, this is not likely to affect their credit score. Consensual liens are very common, especially when dealing with car loans or mortgages. Additionally, if an individual consistently pays their creditors on time, this will likely increase their credit score, as it demonstrates they are reliable and trustworthy.

On the other hand, statutory liens can be highly damaging to an individual's credit score. This is because, unlike consensual liens, a statutory lien is not voluntary, and a creditor will only use it in the event of nonpayment from a debtor.

If an individual is subject to a statutory lien, this demonstrates that they are either unwilling or unable to pay back their debts, which will harm their credit score.

Finally, a judgment lien is the most serious of all. If a debtor forces a creditor to use a judgment lien, that means that all other legal avenues have failed to make the debtor pay. As such, a judgment lien will have an extremely negative impact on the debtor's credit score.