The 5 Most Common Types of Federal Tax Liens

Posted by Team - 03 June, 2020


federal_property_tax_liensA lien is a legal claim that a creditor makes against a debtor’s property to force past-due payment of a debt. Liens are public documents that tell all other creditors that the lien-placing creditor is first in line for the money if the debtor doesn’t pay up. And because liens are public documents, a lien can affect your credit report.

The federal government uses liens as income tax payment enforcement. But your mortgage is also a lien. So, a lien isn't always a bad thing. In the case of your mortgage lender, the lien against your home is a way of holding the property as collateral against the home loan you signed for to buy it.

Liens are placed against property, but not always real property. A lien can be placed against personal property, business property, and other assets. 

Liens can be consensual or non-consensual. A consensual lien is one you agree to, like your home mortgage. A non-consensual lien is imposed without your consent, like a judgment lien.

There is a variety of liens out there. Let’s see what they are. Also, we will review the difference between a lien and a levy.

Lien vs. Levy

As it says above, a lien is a legal claim made against property. It may be the federal government placing a tax lien, or it can be your bank placing a mortgage lien. The lien lays claim but does not seize.

A levy is the actual seizure of property to pay for a debt. It takes your property to satisfy a tax debt, a judgment, child support, alimony, or other debt that your state allows others to use levies to meet.

Now, let’s look at the various types of liens.

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Federal (Income) Tax Liens

Starting with the big dog, the federal government, in the form of the IRS, places a lien against your property for non-payment of income taxes. Because you have been notified you owe taxes, yet have not paid due to negligence or refusal to pay, Uncle Sam places a lien against your property.

Income tax liens may be placed against assets owned by an individual or a business if the company owes back taxes.

The IRS now has the legal right to your property if you don't pay up. In this case, not only must you pay your back taxes to get the lien removed, but you must also pay interest and penalties for paying late.  

There are other ways to address a lien besides paying off the debt.

  • Discharge of property — a discharge removes the lien from a specific property. Eligibility is determined by the Internal Revenue Code. A discharge allows you to sell the property to raise cash to pay your debt.
  • Subordination — subordination doesn't remove a lien. Still, it will allow creditors other than the federal government to go to the head of the line. Subordination can help you qualify for a mortgage or other loan if needed. 
  • Withdrawal — a withdrawal removes the public notice of Federal Tax Lien. It lets everyone know the IRS is not competing for your property against other creditors. However, you still have to pay up.

Federal tax liens sound just as scary as the IRS, but you have several ways to obtain relief.

Property Tax Liens

Now that you’ve read about income tax liens, you can probably guess what a property tax lien is. 

Your municipality and county use taxes on real property to fund public services like the police, fire department, library, and other services. If you don’t pay, a property tax lien is placed against your property until you do pay.

Depending on the state, you may have a lien slapped on your property if you don’t pay certain municipal charges like your sewer and water bill.

Like back income taxes, you may be forced to pay interest and penalties as well. Alternatively, you can have your debt dismissed in bankruptcy court. Or you can reach a compromise to resolve your outstanding debts with whichever agency placed the lien.

Liens for Child Support and Spousal Support

Divorce is hard on the entire family. If children are involved, one parent is typically required to pay child support for each offspring until age 18. However, times can become difficult, or the payor may become stubborn, and child support goes unpaid.

Non-payment of child support can result in a lien against real or private property. For instance, you may have your wages garnished or your retirement fund reduced. 

During the COVID-19 pandemic, child support was deducted from stimulus checks given out by the federal government. Non-payment of child support can even affect worker's compensation and unemployment insurance payments. 

Spousal support is similar, although it’s different from what it used to be. In the good old days, when wives tended to stay at home and may not be self-supporting in the event of a divorce, the soon-to-be ex-husband was expected to pay alimony to support the former wife. Occasionally, if the wife had the money, spousal support could go the other way.

Besides real property, child and spousal support liens can be placed against a boat, car, checking or savings account, retirement account, or investment account.

Judgment Liens

A judgment lien is so-named because a court of law issues a judgment against a debtor for failure to pay a creditor. As mentioned before, a judgment lien is non-consensual. You don’t consent to this lien, it is forced upon the debtor by the court. A creditor sues the debtor for payment, and the court files a judgment. 

Another example of a judgment comes if you injure someone else in an accident, you may be sued for damages. If your insurance doesn’t cover those damages, a judgment lien may be placed to secure payment.

Payment may be forced by wage garnishment, property attachments, or property liens.

A judgment lien grants a creditor the right to take possession of real or personal property if the debtor fails to fulfill a contractual obligation. The lien can be against an individual or a business. The creditor then has access to assets from the debtor’s business or real property to personal property such as cars, appliances, furniture, and anything else of value.

State law determines what types of property may have a lien placed against it.

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Liens are legal instruments used to compel payment of a debt. If the debt is never paid, nor discharged, subordinated, or withdrawn, the lien's owner has the right to levy the property against which the lien was placed.

A lien is a public record and can be placed due to non-payment of income taxes, property taxes, child support, spousal support, a loan, or as a judgment for failure to fulfill a contractual obligation.

A levy, unlike a lien, is the actual seizure of property. Also, unlike a lien, it is not a public record and shouldn’t impact your credit report

You can avoid liens by paying your taxes, property and income, support payments, and repaying your loans. However, if you can’t avoid a lien, be sure you understand what type of lien you are dealing with.

Property Lien Guide

Topics: Real Estate, Legal

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