A lien is a legal encumbrance on your personal property, such as your vehicle or real estate. For example, if you finance a car, the lender is the lien holder and has the right to repossess the vehicle if you fail to make payments as agreed. As long as a lien remains in place, it may be difficult or impossible for you to sell or transfer the encumbered property. Although having the lien set aside accomplishes much the same as having a lien removed or released, the two methods of ending the encumbrance are different.
Types of Liens
Creditors such as mortgage or finance companies may become lien holders upon extending credit for the purchase of a specific item, such as an appliance, a home or a vehicle. The contract you sign typically contains language stating that the lender maintains a financial interest in the property and may seek to seize and resell the property if you default on the loan. Contractors, subcontractors and suppliers who provide goods, services or labor for a real estate project might file a lien against the property if they are not paid as agreed. State, local and federal taxing agencies also may file liens against property to collect delinquent taxes.
Setting Aside a Lien
Dismissing, vacating, voiding or setting aside a lien requires a legal decree from a judge or court. Mechanic's liens, tax liens and liens resulting from judgments are the most common types of liens set aside. A lien is most often set aside because the lien violates the law in some manner. Judges will set aside or dissolve a lien that the lien holder used fraudulent or illegal means to obtain. The lien holder must also comply with laws regarding how to file a lien. For example, a lien is subject to a statute of limitations and the lien holder must file within a certain number of days, with each state determining how long a period that might be. Prior to filing a lien, most states require the lien holder to serve notice on the debtor; the language and form the notice must take is specific and must be followed precisely. Again, each state determines the exact form the notice must follow. The court may also set aside local jurisdiction tax liens for debtors filing a Chapter 13 bankruptcy.
Releasing a Lien
In contrast to setting aside a lien, removal or release of a lien is at the sole discretion of the lien holder. The simplest method by which to secure removal or release is to pay off the debt that gave the creditor the right to seek a lien on the property. This may mean making the final car payment, voluntarily selling the home or refinancing the loan. However, some creditors or taxing authorities may be willing to negotiate a payment plan and remove the lien as long as the debtor meets the revised payment schedule. The creditor may also accept a lump-sum payment that is less than the amount outstanding on the loan. Some taxing agencies, such as the Internal Revenue Service, may also release a lien if the debtor can prove severe financial hardship.
Ramifications of a Lien
Securing a lien typically is the first step in the process of seizing an asset. For example, the IRS cannot seize your property on the basis of a lien alone. Instead, a levy must first be obtained, which gives the agency the right to physically take control of your assets and sell any property seized. Private creditors may be required to file a notice of foreclosure or repossession prior to seizing your property. A lien will have a negative impact on your credit report.
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