What is a Lien?

A lien is a term that is thrown around a lot in the legal and financial world, but do you really know what it is and how it can affect you? To put it simply, a lien is a right to keep possession of property belonging to another person until a debt owed by that person is removed. Used in context, if you financed your car and are still making monthly payments, there is a lien placed on the title of the vehicle. Once you have paid in full, the car becomes your personal property and the lien is removed, because you have settled your debt.

You can also have a lien attached to your property, alerting others that you owe the creditor some money. Liens on real estate are a common way for lenders to collect what they are owed. Since you need to have a clear title in order to sell or refinance your property, a lien is an easy and relatively inexpensive way for creditors to get the money they are due. Borrowers are often eager to pay off the lien in order to clear up the title.

Types of Liens

Liens are most often enforced under state laws, although there are also federal tax liens. The government typically gets involved when an individual becomes delinquent on tax payments and shows no indication of paying off his or her debt. The IRS has the ability to place a legal claim against the individual's property, including his or her vehicle, bank accounts, or home. If a federal tax lien is issued, it takes precedence over all other creditors' claims.

The only way to take care of a federal tax lien is to pay the tax owed in full or reach a settlement with the IRS. A lien affects the individual's ability to obtain lines of credit or sell existing assets. If a taxpayer ignores a tax lien, the IRS can seize his or her personal assets.

Title Search

If a buyer is purchasing a used car or piece of property, it is extremely important to conduct a title search. A title search examines a collection of publicly recorded documents regarding the history of the car or property in order to make sure there are no liens. If there are liens, the buyer may have a difficult time securing the clear title. It's better to know what you're getting into before making a major purchase in order to avoid the shock that comes with paying for the item and then realizing you do not own the property free and clear.

Here's the bottom line: if you have a lien on a personal asset, it is in your best interest to take care of any outstanding debt as soon as possible. A lien can inhibit your ability to make financial transactions in the future, so it's best to pay the creditors what they're owed as soon as possible. Plus, be sure to conduct a title search whenever you're in the market for a house or car, because you don't want to buy something with a lien attached to the title.