Liens are used to secure an interest in an asset. Liens can be an effective tool in debt collection, if used correctly.
A lien is a claim against asset of another that prohibits the asset from being sold or transferred until the debt is paid back. Powerful tool, right? Right! However they do not work in every situation. It is important to know how to obtain a lien and how, and when to use it correctly.
There are many types of liens. If you have trouble sleeping, click here to learn all about the many types of liens that exist.
For small business debt collection, there are basically only two types of liens that apply: mechanics liens and judgment liens.
Mechanics liens are generally used by trade contractors when they are not paid for a service that improves a project. The contractor put the owner of the property on notice that there is a claim against them. For example, an electrician or painter who works as a subcontractor and is not paid may be able to lien the property in question with a mechanics lien. Not all services are eligible and laws vary from state to state, but generally there has to be an fixed improvement to the property in question and subsequent non-payment. Services of an architect or engineer might be eligible, whereas a home heating oil delivery would not be, as it does not make a fixed improvement to the property.
There are two things to remember about mechanics liens: 1) There is a limited time after you file. It varies by state, but generally if you are not paid in 30 days, check to see if your product/service is eligible. 2) Mechanics liens are generally only good for a year or so. If the debt is not repaid, you will have to take action to either foreclose the property or sue for a court judgment and place a judgment lien on the property.
Another important thing to consider, especially for those working with consumers, is the importance of getting a solid contract upfront that has the appropriate language to protect you. Many mechanic liens are defeated because the original contract for the work lacked specific language required. Ask your attorney to check your contract today and save yourself trouble later.
Judgment liens can only be used after you receive a court judgment in your favor. The first step in making sure you get a proper judgment. Once you have a judgment, there are ways to you can put a lien property or equipment. Once again, as with most things, the way to file a lien varies by state. You collection partner can assist you.
Do you homework beforehand, and check to see which liens are ahead of you. It costs money to file a lien, and the last thing you want to do is waste your money liening an asset that is already so encumbered that your lien becomes worthless.