What is a lien & how does it work?

A lien is a legal right or claim on any type of property that can be used as collateral to ensure the repayment of a debt. Liens give the creditor the right to sell the borrower’s property if the borrower fails to repay the debt.

Learn more about liens, including how they work, the different types and more with this guide.

What you’ll learn:

• A lien is a legal claim against personal property by a lender to satisfy a debt.

• Liens can be voluntary or involuntary. 

• Liens can make it harder to borrow money.

A lien is a legal claim placed on a borrower’s property to secure payment on a debt. Instead of taking ownership immediately, a lien gives the creditor a financial interest in the property that can be enforced if the borrower doesn’t pay.

Here’s how the process typically works:

• A debt is created: A lien begins with an obligation—such as a loan, an unpaid bill or a legal judgment.

• The lien attaches to property: The creditor places a lien on a specific asset, such as a home, car or other valuable property. This means the property now serves as collateral for the debt.

• The lien secures repayment: If the borrower doesn’t repay their debt, the creditor can use their claim to recover the money, often by forcing a sale or taking the asset.

Once the borrower satisfies the obligation, the lien is released and the creditor’s claim is removed from the property. But if the borrower defaults, the creditor can enforce the lien. Depending on the type of lien, that can mean foreclosure on real estate, repossession of property or a forced sale to recover unpaid debts.

Some liens are voluntary—or consensual—meaning both the borrower and the creditor enter into the agreement willingly. But there are also involuntary liens, which occur without the borrower’s consent. These are typically the result of a legal disagreement. 

These two categories cover several types of liens, including four common examples:

A mortgage lien is a voluntary lien created when a homeowner pledges their property as security for a home loan. It gives the lender a legal interest in the property, enabling them to initiate foreclosure proceedings if the borrower fails to make payments.

A judgment lien is one that’s placed as part of a court judgment. For example, if a lender sues a borrower for nonpayment on a debt, the court may put a lien on the borrower’s property.

A judgment lien is one type of involuntary, or nonconsensual, lien.

Tax liens are involuntary liens. If someone fails to pay income tax, property tax or any other state or local tax, the government can place a lien on their property. This might include real estate or other financial assets.

Tax liens typically take priority over other types of liens. For example, if you sell your home, the money must first go to pay off a tax lien before you can apply any remaining balance to a mortgage lien.

A mechanic’s lien, sometimes called a construction lien, can be put in place if a property owner fails to pay a contractor or subcontractor for work done on their home. Mechanic’s liens differ from other types of involuntary liens in that they may only be placed against the property on which the work was done. It can’t apply to the homeowner’s other assets or real estate.

Yes, a lien may indirectly impact your credit—though it generally depends on the type of lien. Liens don’t appear on your credit reports, but not paying your debts can negatively affect your credit scores. And that could make it harder to qualify for loans and credit in the future.

Typically, the only way to remove a lien is to pay the debt that’s attached to it. In cases where the lien is placed unlawfully, or the lender and borrower disagree on whether the repayment has been completed, a lien may be removed in court.

Liens are legal tools that creditors use to secure their investments. While it’s common to have a lien as part of a home loan or auto loan, failing to pay the debt attached to the lien can have consequences on your personal finances. It may also make it hard for you to sell your property or take out additional loans in the future.

If you’re interested in learning more about how your credit can be affected by late payments, check out our guide to derogatory marks on your credit report.