“…when lenders see a lien they start wondering what property is subject to the lien and for how much money.  Liens cast a lot of uncertainty and can jeopardize a person’s entire financial well-being.”

Dear Dr. Per Cap

I applied for a loan from Sequoyah Fund and was told I can’t have unsatisfied liens or other public records on my credit report.  What does that mean?

– Please Don’t Lien

Dear Please Don’t Lien

Sequoyah Fund is generally more lenient (pun intended) than a mainstream lender like a bank or credit union if a few late payments show up on a credit report.  But when it comes to liens, a type of public record, like my Navajo aunt used to say when she caught us raiding the cookie jar before supper “No way, Ray Begay!”

In the legal heavy world of debt, liens are a big deal.  They’re claims against a borrower’s property which is often referred to as collateral.  For example, when a person borrows money to buy a car a lender will place a lien on the vehicle.  That way if the borrower can’t make payments the lender has the right to send out a tow truck.  Or what happens more often nowadays, just turn off the ignition remotely.

Remember that even though a borrower has keys to a vehicle and drives it, the lender’s name is listed on the title as a lienholder.  Furthermore, the lien remains until the vehicle is paid off.  At which point the car owner is no longer a borrower and can apply for a clean title.

There are many types of liens but I’m going to spare you what can make up a whole course in law school.  Just understand that liens fall into two broad categories – voluntary liens and involuntary liens.

Voluntary liens, as you might guess, are liens in which the borrower willfully uses their property as collateral, like my example of a car title lien.  A mortgage lien on a house is another example.

An involuntary lien occurs when a property owner does not give consent to a claim.  Think mechanic’s lien.  If you’ve ever taken a vehicle to a repair shop, you should know that the shop can take possession of your vehicle. In fact if you read the fine print on a repair work order you’ll probably see words similar to these:

An express mechanic’s lien is hereby acknowledged on vehicles to secure the amount of towing, storage, and/or repairs.

Yep, leave it to a lawyer to come up with a slick way of saying “Pay your bill or we’re holding your vehicle hostage.”

A tax lien is another type of involuntary lien because the IRS or a state can seize property for back taxes owed.  Tax liens can get really ugly and some even make headlines.  A few years ago Charlie Sheen, the former A-list actor who has been known at times to be a chalupa short of a combo meal, faced a $5 million federal tax lien.  I guess he wasn’t winning after all.

Another way you can be subject to a lien is if you owe money to a business or even another person who files a request for judgment through a civil court.  If the request is granted a judgment lien provides that business or person with a claim to your property.

So yeah, Sequoyah Fund doesn’t like unsatisfied liens on credit reports.  They’re actually worse than collection accounts, which are no laughing matter either.  Because when lenders see a lien they start wondering what property is subject to the lien and for how much money.  Liens cast a lot of uncertainty and can jeopardize a person’s entire financial well-being.

Liens also aren’t usually dismissed through bankruptcy, unlike collections which are often wiped clean.  And the statute of limitations for liens varies based on their type and the state where you reside.  In North Carolina it’s usually ten years.

The quickest way to satisfy a lien is to just pay it off.  You can also dispute a lien in some states by filing a Notice of Contest or you can wait to be sued and battle it out in court.  But that’s a last resort and you better have a really strong case when going that route.

So let me close with some good news.  A few years ago the credit bureaus began removing many tax liens and civil judgments from credit reports because many hard working honest folks were being unfairly punished by liens.  Hope that helps!

Ask Dr. Per Cap – EBCI Money Smart is brought to you by Sequoyah Fund and Shawn Spruce Consulting. For more information, visit www.sequoyahfund.org. To send a question to Dr. Per Cap, email agoyopi@gmail.com.