Types of Liens and What You Should Know About Them

Do you need to use a lien to protect your business interests? If you're new to running your own company or managing its financial matters, you may not be familiar with the lien process. These financial details can be confusing, but understanding how to deploy liens in particular situations is a way to ensure that you get payment you deserve and avoid unnecessary risk.

To help you familiarize yourself with this legal tool, here is a short guide to the three main types of liens.

Consensual Liens

As their name implies, consensual liens are those to which both parties agree in advance. This typically affects a business when it asks for credit. By agreeing to allow a lien that asserts the financial interest of the lender, you may be able to secure more credit or get a better rate. While you benefit from such a lien, you must agree to it, and you continue to have the right to say no and seek credit in other ways.

With a consensual lien, when you pay off what is owed on the debt, the lender would file to remove the lien against the asset held for collateral. You must ensure that you get this release in order to do what you want with the item in the future.

Statutory Liens

The second type of lien, a statutory lien, is one that is provided for through by law. The most common type of lien in this category is a tax lien. If you fail to pay your taxes — personal, business, or payroll — the taxing authority is given the right to pursue legal means to force payment. A tax lien is attached to an asset, requiring payment in order to sell or do other transactions on that asset.

A more common form of statutory lien is a mechanic's lien. This lien type is designed to ensure that someone who builds or puts a great deal of work into repairing an asset is appropriately paid for that work. The lien on the asset means that the builder's interest must be paid first before anyone else receives money for the transaction. Only the one who filed for the lien can file to remove it.

Mechanic's liens can be tricky because a subcontractor also has the right to file a lien if they aren't paid by the contractor. A business should generally request proof that all liens by any vendor involved in a project have been removed upon issuing final payment.

Judgment Liens

The type of lien that most businesses would rather not have to deal with is judgment liens. This lien is the result of having to go to court to sue someone for damages. It can also be the result of being sued yourself.

If you win your case against a party that failed to pay you for services performed, for instance, you still have to seek payment of those damages. If the other party still doesn't pay, the judge may issue a lien on some asset of theirs in order to secure payment for you. Conversely, if you lose a case brought by a vendor or lender, you could wind up having the lien on one of your assets.

Do you need to know more about a particular type of lien? Does your business need to use liens in order to protect itself financially? Or does a piece of property have a lien that you must deal with? Whatever the situation, your best source of guidance is an experienced attorney. Wolfe, Jones, Wolfe, Hancock, Daniel & South, L.L.C. , can help. Call today to make an appointment and learn what your next steps should be.