An involuntary lien is a tool that allows the government or others to get their hands on your property when you don’t pay certain debts. You don’t have any say in the matter, but fortunately, involuntary liens aren't allowed in many cases--they're few and far between.
One example of involuntary liens at work involves the consequences for homeowners who don’t pay their property taxes. The county will eventually sell the house to pay the past-due tax obligation. The county can do this because state law gives it the right to “lien” real property—sell the property to pay off the owner’s debt—even though the owner never gave the county explicit permission.
Fortunately, most creditors don’t have the power to involuntarily lien your property; you must voluntarily agree to it (this agreement was in the fine print of the sales contract you signed when buying the item). So, it’s important to understand who has this powerful right; otherwise, you might not see an involuntary lien coming.
Voluntary and Involuntary Liens
First, understand that with some debts, the creditor doesn’t have the right to take your property if you fail to pay your bill. For example, when you signed your credit card contract, you didn’t give the company a lien on your property. If you stop paying, you will not lose your new pans or the video game you purchased for your daughter. Instead, the company has to sue you and obtain a money judgment. If you don’t pay, you’ll likely face a bank levy or garnishment of your wages (although other collection methods can also be used).
With some purchases, you voluntarily agree to give the creditor a lien when you sign the sales contract. For instance, when you buy a car on credit, the lender will ask you for the right to repossess it if you stop making payments, let your insurance lapse, or do anything else that threatens the car's value. By agreeing to return the property, you gave the lender a lien or a “security interest” in the property. Another example of a voluntary lien is the mortgage on your house. These liens create a "secured debt."
Now for the nasty surprise: Some creditors can file liens against your property without your consent (you never signed anything saying they could do this). This type of lien is called an “involuntary lien.” In most cases, an involuntary lien exists for one of two reasons:
- you owe taxes on real estate (a property tax lien), or
- a law gives your creditor a lien on your property because you failed to pay the money you owed.
Here are some examples of involuntary liens.
Income Tax Liens
If you fail to pay your income taxes, the Internal Revenue Service or a state taxing authority can file a lien document in the county records. This lien can cover both your personal property and your real property. Real property is real estate—such as a house—and the land it sits on. Personal property includes just about everything else, including your car, furniture, electronics, and clothes. When you sell your property, the lien will appear in a title search. You must pay the lien and clear the title before transferring the house to the new buyer. In some instances, especially for very high outstanding tax balances, the taxing authority can seize your property and sell it to pay the taxes. Learn more about Bankruptcy and Tax Consequences.
Mechanics’ and Materialman’s Liens
These liens are also filed in county records and are used by subcontractors and building material vendors to ensure payment for work and supplies used in construction projects. For example, if you don’t pay for your sunroom addition, the contractor can file a lien against your property to ensure payment. When you try to sell your house, the lien will surface, and your buyer will likely insist that you pay it before agreeing to complete the sale. After filing the lien, the contractor can also foreclose on your property.
Judgment Liens
A creditor can sue you, get a money judgment against you, and file the judgment in the county records office. Filing the judgment creates a lien on your real and personal property in that county. It operates like a tax lien: When you try to sell the property, the lien shows up, “clouding” the title. No buyer will want to become the owner of something subject to the lien, so the practical effect is that you’ll have to pay the creditor before you can successfully sell the item.
Questions for Your Attorney
- How can I determine if my creditor filed an involuntary lien against my property?
- If a creditor filed a lien before I purchased a house, will it attach to the new house?
- Can I get rid of an involuntary lien by filing for bankruptcy?