What Is a Tax Lien?: A Straightforward Guide

Every year in the United States, there are over almost $500 billion in taxes that go unpaid.

A tax lien helps to alleviate some of those unpaid debts. What is a tax lien, though?

When you fail to pay a tax debt, the government can put a legal claim against your property. The tax lien protects the government’s interest in your property.

Do you want to learn more about a tax lien in property? Keep reading to learn all about tax liens!

What Is a Federal Tax Lien?

Generally speaking, a tax lien is a legal claim on your property or assets. When you fail or neglect to pay your taxes, the federal, state, or local government places a claim on your assets and property.

This occurs after you’ve received a demand to pay what taxes you owe, and you don’t comply or respond.

A federal tax lien constitutes a legal claim made by the government against your property. First, the IRS will put your balance on the books and assess your liability. They’ll send a bill explaining how much you owe.

If you refuse or neglect to pay your debt in time, they’ll put a federal tax lien against your property.

Tax liens are public record and will appear on your credit report. Plus, they can lessen your ability to refinance assets or take out a loan. Even after you’ve paid your debt, a lien can remain on your credit report for 7 years from the date you file.

Any unpaid debts will remain there for 10 years.

What if You Can’t Pay a Debt?

The IRS always offers payment options to help taxpayers settle their debts. As long as you make an effort to pay what you can, you can easily avoid a tax lien.

If you’ve already had a lien placed on your property, the IRS removes it within 30 days after you’ve paid back what you owe.

Sometimes they’ll extend an offer in compromise if the taxpayer can’t negotiate a payment plan. What that means is that they don’t expect to receive the full amount and will settle on a lower offer than the taxpayer can afford.

What Is a Property Tax Lien?

A property tax lien gets imposed on a particular property to secure payment of taxes owed. A homeowner could be delinquent on their property taxes or have failed to pay their personal income tax.

Either way, the government could decide to put a tax lien on the property. From there, the tax liens are purchased from the government agency. If the homeowner won’t pay the taxes by a certain deadline, the owner of the deed gains ownership of the property.

This process is the reason behind many investors turning tax lien properties into profit. Check out this article to learn how to sell your property with a tax lien.

Let’s take a look at some other property tax lien types.

Mortgage Lien

People take out mortgages to purchase or refinance homes. Mortgages are secured loans. The borrower promises collateral in order to secure their loan.

If they stop making payments, the property becomes the collateral. When a borrower stops making their mortgage payments, the lender can possess the property and foreclose on it to pay the balance of the loan.

Judgment Lien

A judgment lien comes after a lawsuit. For example, say an individual loses a lawsuit, the court then awards a money judgment as damages. At this point, the defendant becomes a “judgment debtor,” and the plaintiff becomes a “judgment creditor.”

If the award doesn’t get paid, then the judgment creditor can put a lien on the debtor’s property.

Mechanics Lien

A mechanics lien is common in the construction industry. Mechanics liens are involuntary specific liens. They’re created through statutory rights.

Each state has a specific set of laws concerning construction businesses and laborers and their rights to claim mechanics liens.

Contractors, equipment lessors, material suppliers, or other professionals provide services for the repair or construction of properties. Sometimes, those professionals don’t end up getting paid. If that happens, the company or individual can file a mechanics lien against that particular property.

Each state has its own expiration date for mechanics liens. It’s the duty of the unpaid individual or contractor to enforce their claim before their state’s deadline. Otherwise, it’ll become ineffective.

If the unpaid professional enforces it, a mechanics lien can also become a judgment lien. Once a foreclosure occurs, if the lienholder is successful, then the mechanic’s lien gets converted to a judgment lien.

How to Stop a Property Lien

There are a few different ways to get rid of a property lien. The best and most obvious way to stop a property lien is by paying off the debt.

Once you pay the underlying debt, the creditor will then agree to release your judgment lien. They’ll file the release with the same authority who recorded the original lien.

Once the lien is released, you can trade, sell, or do with the property as you please.

You can ask the court to remove a lien, too. However, the court’s response depends on the property, the circumstances, and the debt owed.

Another option and the last resort is filing for bankruptcy. When you file bankruptcy, you have the power of federal law on your side to remove the judgment lien in the court of bankruptcy.

The act of bankruptcy supersedes state court. As a result, you can fast track your request to get rid of the lien on your property.

You could also negotiate privately with your creditor. When both parties agree, it’s possible to work out a settlement. You can do so through mediation, arbitration, or informal negotiations.

Lastly, you could choose to wait until the statute of limitations runs out. Every state has its own limitation for lien validity. Once the time has passed, The lien can be taken off.

What Is a Tax Lien?

Knowing what is a tax lien can help set you up for success by ensuring you keep up with payments on your property.

If you’re about to get a tax lien on your property, the best thing you can do is pay off your debt or try to negotiate one you can afford.

You can also look into selling your tax lien property for cash.

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