Bad Debt Liens

Businesses have multiple options when dealing with bad debts of customers. To be considered a bad debt, the business must have taken all reasonable steps to collect of the debt to no avail. Once it is determined that a debtor is not going to make payments on the debt, a business may decide to pursue a lien on the property of the debtor to increase the chances of the company recouping some of losses with respect to the bad debt.

Different Types of Property Liens

Property liens against real property (such as a house) or personal property (such as a car) can be filed by a creditor who is owed a debt by the debtor, when all other options for collection have been exhausted by the creditor. Even in cases where a debtor files for bankruptcy, certain liens can survive the bankruptcy process and allow the creditor to collect on the debt. A property lien acts as a form of collateral, providing protection to the creditor when all other options proved ineffective for recovering the debt from the borrower. In the case of bad debt, liens are generally involuntary (as opposed to mortgages which usually have voluntary liens included in the contract), such that a business can obtain a lien through a court judgment without consent from the debtor. Another type of lien is a mechanics lien, which arises at the point where construction services are performed, or a contractor buys materials and starts making improvements on a piece of property. If the party responsible for paying the contractor fails to make a payment, the contractor may be protected by a mechanics lien.

Which Debts are Subject to Liens?

Real or personal property may be the subject of a lien, so long as the property owner has an outstanding debt with the lien holder. Since the process for obtaining is time consuming, liens are generally only filed when the debt owed is substantial. While any debt can be subject to a lien, nominal debts are usually not worth the time and cost associated with the lien process, and businesses are better off simply writing the loss off on their taxes.

How Do You File a Lien?

After getting a judgment lien, a business must take an additional step to make the lien enforceable against the debtor. Although laws vary from state to state, most jurisdictions require that a business make a formal recording at the registry of deeds of liens obtained in judgment proceedings. In order to obtain a lien on a piece of property, the creditor must file the proper documents in the county where the debtor and property are located. While the laws of every state vary, the general procedure is that the creditor must obtain a judgment in their favour in order to attach to the property. Once a judgment is obtained, the lien must be registered with the land records office to be recorded onto the deed of the property. Once recorded on the deed, the information is available to the public and to future prospective creditors.

The End Result

If a bad debt results in a lien on the real property of the debtor, the debtor is barred from selling or a refinancing until the debt is satisfied. While there is no guarantee that a lien will end up satisfying a bad debt, the holder of a lien at least has legitimate collateral and may find more collection success that they would have without the lien.

Getting Legal Help

Getting any property lien can be a time-intensive and laborious process. To ensure that the laws and regulations of every state are followed, businesses preparing to file a lien should hire an attorney to complete the filing. If a lien is not properly attached and recorded, the business runs the risk of not being able to use the property as collateral for the bad debt. Having an experienced attorney assist with the lien process gives the business a much better chance of success.