Any business or individual that owns a security interest in one of your assets is a lien holder. Lenders sometimes attach liens to property before granting you a loan. The asset serves as the debtor's collateral, and it lowers the lender's financial risk because its security interest allows it to repossess its collateral if you don't pay off your debt. Depending on the type of lien and the lender that owns it, the lien could appear on your credit report.
Voluntary Liens
A lien can be either voluntary or involuntary. You accept a voluntary lien when you give a lender permission to attach a lien to one of your assets to qualify for a loan. Two examples of voluntary liens are mortgages and auto loans. Lien holders report your account to the credit bureaus, and the account appears on your credit report as an installment trade line. The trade line reflects how much you owe, which company loaned you the money and how frequently you send payments. The lien holder's trade line includes information about the debt itself, but does not note that the lender possesses a lien against the asset in question.
Involuntary Liens
An involuntary lien occurs when a creditor attaches a lien to your assets by force. If you owe unpaid taxes or defaulted on a federal student loan, the government can automatically attach a lien to personal property and real estate you own. Non-government creditors, such as hospitals and banks, must win a lawsuit against you before attaching a lien to your assets.
Involuntary liens negatively affect your credit rating, and they appear on your credit report in different ways. If a commercial creditor holds a lien against you as the result of a lawsuit, the case shows up on your credit file as a lawsuit judgment. Tax liens do not require a judgment. These liens appear on your credit report as liens rather than lawsuits.
Reporting Process
If you give a creditor permission to place a lien against your property, only the account that necessitated the lien appears on your credit report. The creditor uses reporting software to file regular reports about your account and its payment history with each credit bureaus.
Involuntary liens appear on your credit report after the court dockets the creditor's judgment by officially entering a record of the lawsuit into the county's public records database. From there, the records are uploaded into a national database. The credit bureaus' computer systems regularly scan the national database for new information. When they locate new information, they add the data to the consumer's credit file.
Time Frame
All voluntary and most involuntary liens appear on your credit record as debts rather than liens. If your voluntary lien is not the result of a judgment and you paid the debt on time each month, the positive record of the account remains on your credit report for a minimum of seven years after you pay off the debt.
If your lien is involuntary and the result of a lawsuit, the judgment that created the lien also remains on your credit file for a minimum of seven years, but it will continue to appear until the judgment expires. State laws vary regarding how long judgments are enforceable. Tax liens report for 15 years if left unpaid. Once paid, the credit bureaus remove the tax lien after seven years.
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