Protecting Your Property From Surprise Legal Claims

Your home may currently face all sorts of legal claims unknown and unfamiliar to you. In fact, it is relatively simple for many types of creditors to record a lien against your property--and often you may not even learn about the lien until you try to sell or refinance.

To use the legal jargon, a lien is an encumbrance--or a charge against property--in the form of a notice attached to certain property. A lien that is recorded with the county recorder basically warns everyone else of a creditor’s claim on your property. Because liens cloud the “clear title� needed to sell a piece of real property, creditors utilize liens as a way to guarantee that they will eventually be paid what they are owed. And under some circumstances, a lien could stop a sale.

While most creditors need a court judgment before they can place a lien on a debtor’s property, there are also certain types of liens that don’t require creditors to wait for a court judgment. The most common type of lien is when you get a car loan, or a mortgage or a home equity loan on real estate. These, of course, are voluntary liens because you are getting money while the lender gets a claim against your property.

Almost all other liens are involuntary, and they can cause big headaches. Indeed, there are also a host of involuntary liens, including liens for unpaid property taxes by the city, federal and state income taxes, child support, excess Medi-Cal payments, homeowner association fees, design professionals and so-called mechanics’ liens which protect contractors who work on your property.

“All these types of liens are different. With some you receive notice from the creditor or the county recorder, with others you may receive no notice at all,� said Alan Kheel, partner at Sherman Oaks law firm Reznik & Reznik. Kheel said his clients are often surprised to learn just how easily someone has recorded a lien against their property. With judgment liens, there is a court hearing before any lien is recorded, Kheel observed. But with non-judgment liens, he said, “a creditor just puts down what they think they are owed. Often the amount isn’t correct.�

Homeowners in the San Fernando Valley and elsewhere in the state have been surprised recently to find liens placed on their properties by Medi-Cal officials seeking to recover medical bills run up by spouses or parents. A class-action lawsuit has been filed challenging the state’s practice, but meanwhile, some of these liens have stymied pending sales or refinancing of homes. These and other liens can be challenged by homeowners in court, Kheel said, but “it’s frightening that the liens don’t require a court hearing in advance.�

“It’s very common that people don’t even know about liens against their property,� said Robin Leonard, a Berkeley attorney who wrote “Money Troubles: Legal Strategies to Cope With Your Debts� and “How to File for Bankruptcy,� published by Nolo Press. In the case of property taxes, “sometimes you think you are paying your taxes on time through an impound account with your lender, and then when you try and sell the property, you find out there’s a lien for unpaid taxes,� she said. “It’s a surprise to many homeowners.�

As if the lien wasn’t bad enough by itself, Leonard said, it can also do damage to your credit. When the IRS records a lien against your property, she said, many other creditors take it as a sign that you are having trouble paying your taxes. But, we all know that the IRS can make mistakes.

Mechanics’ liens lead to some of the most frequent lien-related disputes. Under California’s mechanics’ lien law, any contractor, subcontractor, laborer, supplier or other person who helps improve your property, but is not paid for his or her work or supplies, has a right to enforce a claim against your property in the form of a lien. After a court hearing, the creditor may become a judgment creditor--which means they have a piece of paper from the court saying you owe money and must pay up.

Indeed, a judgment creditor may “execute� on the lien by having an officer of the court seize your property, arrange for a public sale and use the proceeds of the sale to satisfy the money owed. This doesn’t happen very often, however, because the process is time-consuming and expensive. Also, the judgment creditor only gets paid after other earlier creditors--like your mortgage holder--get paid.

Even if you pay your contractor in full, subcontractors, laborers or suppliers who remain unpaid may record a lien. Such claimants are required to provide the property owner with a preliminary notice of their claim. While this preliminary notice is not a lien, it can lead to one if the subs and suppliers continue to not get paid.

Attorneys and reputable contractors suggest that homeowners get an unconditional lien waiver and release signed by the contractor and each and every material supplier, subcontractor and laborer. This cuts off the ability of any of these parties to record a lien on your residence.

Other liens that are recorded against your property should be satisfied with a payment or challenged as soon as they become known to you, advised Kheel of law firm Reznik & Reznik. He also advises homeowners to check once every year or two for any documents recorded with the county recorder that may not belong in the record.

While liens are a powerful way for creditors to reach the equity in your home, California homeowners still protect some of their equity from certain lien holders by taking advantage of the state’s homestead exemption. A homestead declaration protects part of the equity in your primary residence from being tapped by an unsecured creditor who either wants to force the sale of your home or who wants to collect the profits made on the sale of your home.

A homestead declaration will not protect against claims for child support, alimony, taxes, mechanics’ liens or the bank’s mortgage on a home. A judgment lien on real estate, however, will usually not attach to a declared homestead if the homestead was recorded before the judgment.

Although some homestead protection is automatic under a state law passed in 1983, many lawyers still advise that it’s best to file a “Declaration of Homestead� with a county recorder’s office. For a nominal recording fee of $5, the declared homestead may protect your home from forced sale to pay a judgment.