For the most part, whether you define a lien as a property lien or a judgment lien depends primarily on how the creditor obtained the lien. Creditors typically acquire property liens through your voluntary consent. On the other hand, creditors obtain judgment liens as a result of a lawsuit against you for a debt that you owe.
(Find more articles about property and judgment liens.)
When you finance a house or car, you sign a contract promising to repay that debt. Because the amount of money you borrow is so large, the creditor requires something to help minimize the financial risk it takes when it lends you this money.
You voluntarily give the creditor rights to your property in the event of a default. The creditor accomplishes this by making the offer to finance the purchase of the property conditional on you giving it a lien on that property. If the creditor has a lien, if you default on the terms of the agreement (for example, don't pay your mortgage), the creditor may take action to repossess or foreclose on the property you pledged as a security interest. This agreement is referred to as a property lien.
The creditor must perfect the property lien. State law typically requires the creditor to "perfect" the property lien by recording it with the state. The purpose behind this requirement is twofold: it gives other parties of interest notice of the lien and it establishes a catalogue of liens in case a party contests a lien’s validity. The creditor must remove this lien once you pay the corresponding debt in full.
A creditor obtains a judgment lien by winning a lawsuit against you.
While creditors have numerous options to collect on a debt, creditors use judgment liens as the main way to ensure you actually pay the debt off. The creditor first obtains a judgment against you. The creditor records the lien in the county where you or the property resides and attaches the judgment as proof of the creditor’s entitlement to the lien. For more information about how creditors collect on debts, visit our area on Debt Collection: Repossessions, Wage Garnishments, Property Levies, and More.
Most state laws prevent you from selling or trading in the property with a lien. Generally, you must get the lien removed or released before you can transfer it into another person’s name.
To learn about specific laws that affect judgment liens in each of the 50 states, see our Judgment Liens in Your State topic page.
There are several ways you can have the lien removed from your property.
If you pay off the underlying debt, the creditor will agree to release the lien. The creditor then files this release with the same state authority with which it recorded the original judgment lien. Once the creditor releases the lien, you may sell, trade or otherwise transfer the property as you please.
Most states provide a process by which you can ask the court to remove the judgment lien. However, whether the court will approve your request depends on the nature of the property burdened by the lien.
Each state’s laws determine what property you may claim as exempt. If you believe the property affected by the judgment lien is exempt or otherwise protected from creditors, include that language in your request to the court. For information about exemptions, visit our Exemptions area.
Unless you have other debts that necessitate filing bankruptcy, you should only use this option as a last resort. By filing bankruptcy, you can use the power of federal law to remove the judgment lien in the bankruptcy court. This act supersedes whatever occurs in the state court and can act to fast track your request to remove the judicial lien. For more information about removing liens through bankruptcy, visit our Getting Rid of Liens in Chapter 7 Bankruptcy area.