What Are Liens and How Do They Work?

A lien is a legal right to a property; they provide lenders with security. Liens give creditors the legal authority to seize and sell collateral property if a borrower does not hold up their end of a contract or a loan. Furthermore, the property of a lien is not able to be sold by the owner without the lien holder’s consent. 

A lien will often be on public record, which lets potential creditors know about an applicant’s existing debts. Read on to learn about various types of liens and how they are affected by foreclosures. If you find yourself facing foreclosure, reach out to our legal experts – we will be happy to consult with you!

Types of Liens

Liens may occur any time that somebody has a legal claim against someone else’s property – but they are most often on real and personal property such as auto and home loans. 

Mortgage

When you take out a loan in order to buy a house, the property will be collateral. In the loan contract, you agree that the lender may foreclose on the home if you don’t meet set requirements. Some of these requirements might include making monthly payments, living in the property as your primary residence for a certain number of years, insuring the property, and so on. 

Tax

The IRS and local governments will sometimes use liens to collect unpaid taxes. Taxing authorities like the IRS typically are able to collect before your lender – and filing bankruptcy is not always sufficient to discharge all unpaid taxes.

Mechanic’s

These are also called construction liens. When a contractor works on your property and you fail to pay them (or if a contractor does not pay subcontractors), the workers may go to the county recorder’s office to file a mechanic’s lien against your property. 

Consensual

A consensual lien is when a borrower agrees to pledge an asset as security for a loan. This kind of voluntary lien is usually the result of a credit advance. 

what liens survive foreclosure

Lien Seniority

Homes will frequently have more than one liens placed on them. The seniority of liens helps determine which creditors get paid first after a foreclosure. 

Senior Liens

In most cases, lien seniority is dependent upon the order in which they are recorded. However, state property tax liens have seniority over all other ones – meaning that they will always get paid first, even if it is recorded years after your first mortgage. 

Junior Liens

Junior liens, such as second mortgages, are lower on the chain of payout after a foreclosure. 

How to Get Rid of Liens

Usually, liens are only removed by the organization or person that created them, but there are some exceptions to this. 

  1. Pay off the lien. If a lien is legitimate, you will likely need to pay off your debts in order for the lien to be released. Keep in mind that liens are removed when you sell off your home or other property. 
  2. Settle. If you don’t have enough funds to pay off a debt, try to negotiate with your creditor. They may be willing to accept less than what you owe them. 
  3. Correct the lien. If you believe that a lien against your home is illegitimate, contact the lienholder. It is possible that the lien was supposed to be released when you purchased used property, but it was overlooked. 
  4. Dispute the lien. You may need to pursue legal action against a lienholder. Be sure to check whether your lien was set to expire after a certain number of years. 
  5. File Chapter 13 bankruptcy. In most cases, a lien will survive Chapter 7 bankruptcy. However, Chapter 13 bankruptcy facilitates lien stripping, in which you can eliminate a junior lien from your property. For more information on Chapter 7 and 13 bankruptcies, read our article. 

Currently, the sales of tax liens in New York have been halted until November 3rd. This is due to the severe economic impact of COVID-19. 

Does Foreclosure Clear the Title to a Property?

You may be wondering – who pays liens after foreclosure? Well, upon foreclosure, the title of a property is transferred either to the lender or to a 3rd party. In many cases, the lender will pay off any tax liens left on the property; the foreclosure process will remove junior liens. 

Does Foreclosure Clear All Liens?

Foreclosure tends to clear up all liens that are junior to the foreclosing lien – but not liens that are senior to it. For instance, the foreclosure would not clear a property tax lien. If the lender doesn’t pay off that tax lien, it would be passed on to the next property investor. 

Legal Advice on Handling Liens

For legal advice on handling liens during a foreclosure, fill out a consultation form; one of our legal experts will provide you with a free consultation. If you receive a lien sale warning notice regarding tax liens, you can also reach out to the NYC Department of Finance for further clarification. We would also recommend checking out some of our other guides on how to avoid wrongful foreclosure and the general steps of a foreclosure

FAQ

Q: Can a bank foreclose on a house that has lien?

Yes, a lender can foreclose in many cases in which an outstanding tax lien exists.

Q: What happens when you foreclose on a lien?

The priority of your liens (if you have multiple) will establish how the foreclosure funds are paid out. The senior liens will be paid off before junior ones. Remember: foreclosure will eliminate liens but not debt.

Q: Does tax lien foreclosure wipe out mortgage?

Because property tax liens take precedence over other liens, a tax lien foreclosure eliminates junior liens – including mortgages.

Q: Do bank-owned properties have liens?

In most cases, when a bank owns a property, it will pay off tax liens, title liens, and other liens before offering the property for sale on the market.

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