A lien is a notice attached to your property telling the world that a creditor claims you owe it some money. A lien is typically a public record. It is generally filed with a county records office (for real property) or with a state agency, such as the secretary of state (for cars, boats, office equipment, and the like). Liens on real estate are a common way for creditors to collect what they are owed. Liens on personal property, such as motor vehicles, are less frequently used but can be an effective way for someone to collect.
How a Lien Affects Your Property
To sell or refinance property, you must have clear title. A lien on your house, mobile home, car, or other property makes your title unclear. To clear up the title, you must pay off the lien. Thus, creditors know that putting a lien on property is a cheap and almost guaranteed way of collecting what they are owed—sooner or later.
How Do Creditors Collect on Liens?
Generally, creditors have the right to have the property sold to pay off the lien, usually by way of a foreclosure sale. However, except for tax liens (see below), they rarely do so. This is because in most cases your mortgage was placed on the property before the liens and so must be paid off before any liens are paid. If the creditor forecloses on the lien, it has to keep up the payments on the mortgage or lose the property.
Instead of forcing a foreclosure sale, creditors usually wait until the property is sold. Buyers often won’t buy the property unless the title is clear, meaning it has no liens. So, the seller will use part of the purchase price to pay off the lien.
This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.