The purpose of a lien is to give your creditor a stake in your property until you pay off a debt. It’s a “…charge against or interest in property to secure payment of a debt or performance of an obligation.” (11 USC §101(37).)
So how does a lien work?
If you don’t satisfy your debt obligation, and the property encumbered by the lien gets sold, the lienholder’s debt will be repaid from the proceeds first. The lien helps guarantee that the creditor will get paid.
Liens fall into one of two categories: voluntary and involuntary liens. A voluntary lien is one that you agreed to when you entered into a credit contract. It’s part of the contractual terms. Often called a “security interest,” this type of lien helps guarantee, or “secure” the payment of a large, risky loan that a lender would stand to lose significant money on if you didn’t fulfill your obligation. For instance, home purchasers routinely give the mortgage lender a lien against the property that allows the bank to foreclose on the home. If you don’t make timely payments, the bank can sell it at auction and use the proceeds to pay down the mortgage debt. The same holds true for your car note. If you fall behind on your car payment, the lender can repossess (take back) the vehicle.
(Learn more by visiting our Property and Judgment Liens page.)
By contrast, you don’t agree to an involuntary lien. Instead, your creditor obtains the lien right as a matter of law. Here are a few examples of liens that a creditor could get without your consent:
In some cases, you can get rid of (avoid) certain statutory liens—such as a mechanics’ or tax lien—if the creditor failed to “perfect” the lien—file it with the proper institution—before you filed your petition (the official paperworkthat initiates the bankruptcy). For instance, if the federal government failed to record a tax lien against your property before your bankruptcy filing, you could avoid the lien in your bankruptcy action.
(For more information, see Nonconsensual Liens (Liens You Don’t Agree To).)
Understanding liens can be complicated—and you might not even know whether your creditor has a lien against you. If you’re filing for bankruptcy, it’s advisable that you meet with a bankruptcy attorney to discuss the effect of any liens a creditor might have against your property.