Too often creditors are faced with accounts that are seemingly uncollectable. If the debtor had money on hand to pay, presumably they would not have incurred the debt at all, right? Especially in the realm of medical debt, and long term care where bills can mount at rates of hundreds of dollars per day, large lump sums can be difficult for debtors to pay with their liquid assets. In these situations, creditors have to be creative to find ways to recover even if it means that payment may not be immediate.
Often the most valuable asset a debtor will own is real property. In these instances, creditors have an opportunity to secure their debt for payment in the future via a lien on that property. In this article, we will explore what a lien is, and how an attorney can help a creditor use a lien to secure payment on an otherwise unrecoverable account.
What is a lien?
Put simply, a lien is an interest that an outside party has in someone’s property. Liens are regularly seen attached to real property (i.e. the mortgage you take out to purchase a home). However, liens can be held on personal property as well (i.e. a loan you take out to purchase a car).
When is a lien a viable option for collection?
When it comes to collection, liens should be seen as an option of last resort. Liens are wonderful tools for when a debtor has no or insufficient liquid assets to pay a debt, and there is no other way for the creditor to be paid during the debtor’s lifetime.
However, a lien is only viable when a piece of property has sufficient equity value available to cover the debt owed. In order to determine if a piece of property is appropriate for recovery by a lien, an attorney can perform a title search and analysis to ensure that the debtor has good title to the property, that the debt remaining on any other liens or judgments that may be attached to the property, and that the debtor owns the property in such a way that will allow for the creditor to collect against the same. If the debtor owns the property jointly with another person, the equity value attributable to the debtor may be lessened, and securing a lien altogether may be more challenging or even impossible, depending on the type of joint ownership. The creditor’s attorney will be able to advise the creditor on all of these variables based upon the outcome of the title search.
How can a creditor obtain a lien?
Some creditors are granted the right to impose liens on debtors’ property by statute, such as mechanic’s liens in those states that recognize them. However, medical providers are not granted such statutory authority. Instead, creditors seeking to collect medical debt must take affirmative steps to obtain a lien, either with the debtor’s voluntary grant of a lien or involuntarily through court proceedings.
A voluntary lien takes the form of a mortgage or deed of trust on the real property, executed willingly by the debtor. These mortgages are often accompanied by a promissory note, in which an attorney can help the creditor set forth the terms for repayment such as when the mortgage will come due, if any monthly payments are required before the due date, the rate of interest that will accrue, and can even include specific language to give the creditor’s lien priority over other liens that may already exist on the debtor’s real property.
By contrast, an involuntary lien requires the creditor to bring a lawsuit against the debtor. In that litigation, the creditor must obtain a judgment for the debt owed. Then, the judgment can be attached to the debtor’s real property as a judgment lien. Again, an attorney can assist the creditor in crafting language for the judgment regarding imposition of interest, or even recovery of attorney’s fees, in addition to the principal amount due.
When does the lienholder receive payment?
The terms of payment on a lien are set in the documents that form the lien – the promissory note that accompanies a voluntary mortgage or deed of trust, or in the language of the judgment that forms the judgment lien. When a creditor is forced to seek recovery via a lien, typically the debtor is not in a position to be able to make installment payments. Therefore it is common for the lien to require payment of the full balance in a lump sum on a given date. This date is usually tied to the future sale of the property by the debtor, or the debtor’s death. However, an attorney can assist the creditor with determining if monthly installment payments would be viable based upon the debtor’s circumstances. In those instances, the lien will act much like a typical home loan where the debtor will make monthly installment payments, and the remaining principal balance due at the time of the sale of the property or the debtor’s death will then be due in a lump sum. If the debtor’s death is the event that triggers payment, then the creditor’s attorney can further assist with ensuring the creditor follows any state probate code requirements to assert a claim for payment against the debtor’s estate.
When creditors need to play the long game in instances where a debtor does not have sufficient liquid assets to pay immediately, a lien is a wonderful tool for creditors to use to secure future payment. By utilizing the advice and expertise of legal counsel, creditors can use voluntary or involuntary liens to maximize recovery of not only principal debt, but also interest and attorney’s fees. In this way, despite being a recovery option of last resort, liens are an integral part of a creditor’s collection toolbox.
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