How Can a Lien Against Your Property Affect You?

A lien is usually a last resort for a creditor whose attempts to collect payment from a debtor have been successful. A lien is a legal document the creditor files with your local county office, which states that the creditor has an interest in your property.

Types of Liens

The most comment liens are judgment liens, mechanic's liens and tax liens. A creditor or other individuals to whom you owe money can file a judgment lien against your property if they sue you in court and win. A painter or plumber can file a mechanic's lien on your property if you fail to pay him for services rendered. General contractors usually file a mechanic's lien on a person's property as insurance they will be paid for work performed. The IRS will place a tax lien against your property for unpaid taxes.

Impact

A lien gives a creditor a stake in your property and limits what you can do with it. You will not be able to sell your property. You will not be able to take out a home equity loan on your house until your debt is repaid and the lien is lifted. Liens adversely impacts your credit rating because they are obtained as the result of a judgment filed against you. Judgments remain on your credit report for 10 years. Future creditors will view you a high credit risk. Obtaining a mortgage, car loan, apartment, insurance and even a job could will be more difficult with a lien on your credit report.

Avoiding a Lien

Taking control of your debt before it escalates to the point where you are facing a potential lien is the best way to avoid one. You can also avoid a mechanic's or judgment lien by filing bankruptcy. Filing a Chapter 7 discharges your debts and liens, except for tax debts, which must meet certain conditions in order to be discharged.

Tax Debts and Bankruptcy

A Chapter 7 can only discharge tax debts if the unpaid taxes are income taxes. Payroll or tax fraud penalties cannot be discharged. You can discharge a tax debt if it is at least three years old, you filed a return for the debt you want discharged, you did not commit tax fraud or try to evade paying your taxes and your tax debt was assessed by the IRS at least 240 days before you filed bankruptcy. Filing Chapter 7 will not remove tax liens placed on your property before you filed bankruptcy. It will prevent the IRS from seizing your bank account or garnishing your wages, but you will still have to pay off the lien before you can sell your property.