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 three types of liens that apply: mechanic’s liens, judgment liens and UCC liens.
Mechanic’s 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 mechanic’s liens: 1) There is a limited time after you provide your service to file one. 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 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.
In the State of Maine, once you get a judgment,you can file a writ of execution against your customer. A Maine writ of execution is filed a the country level, and secures any property owned by your customer in that county. They cannot sell or refinance their home without your release. If they own property in more than one county, for example Cumberland and York, you would have to file the writ of execution in each county. There are specific laws governing how to inform the property owner of the lien, so research and follow the law.
A judgment lien may also be used to garnish wages, bank account or other personal property. There are many regulations to follow and limitations on the amount you can attach. Also, you cannot attach certain types of income such as attach disability or alimony.
A UCC lien is a federal lien that is traditionally placed voluntarily (consensual) against an asset to secure a loan. For example, a business buys equipment from Bank A, and Bank A puts a lien against the equipment. Some UCC liens must be specific, against a specific asset. Others, such as a large bank loan can be blanket liens against all assets. You can use a UCC lien against a business or an individual. After a judgment, you can file an involuntary (nonconsensual) UCC lien against an asset, if you know what/where it is.
You can search UCC liens by state. Here is a link to the UCC Maine search tool. It is a good idea to check this information before granting credit to a new customer.
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 attaching a lien to an asset that is already so encumbered that your lien becomes worthless.