How Does a Tax Lien Affect Your Credit?

A tax lien is one of the final collection steps that a government takes in order to collect a tax debt that it is owed. It involves making a legal claim against the property of a person or company who owes taxes that are past due. A tax lien not only affects the ownership status of the property, it also affects the owner's credit rating.

Significance

Tax liens appear on your credit report as a public record. Other examples of public records are bankruptcy filings or judgments. Public records appear in their own section on your credit report. The credit scoring models treat each type of public record differently when calculating a credit score. The effect of a tax lien will also vary depending on the individual circumstances. If a person has a perfect credit history and a tax lien is reported, their score will drop considerably. If they have multiple negative entries then the effect of a tax lien by itself will be much less as their score is already considerably damaged.

Time Frame

Tax liens can stay on your credit report longer than most other negative items. An unpaid tax lien can remain on your credit report for up to 15 years. A paid tax lien can be part of your credit report for up to seven years.

Function

A tax lien is primarily used to secure the payment of taxes owed. In addition to this, a tax lien will make it difficult for you to obtain credit due to the negative credit report entry. Many people are extremely concerned with the information on their credit report or with their credit score and how it affects their ability to borrow money. This concern may lead a person to pay the lien faster than they otherwise would.

Considerations

Your tax bills should be some of the first bills that are paid. If you do not pay them the resulting tax lien could cause you to lose your home or other property. Another consideration is that outstanding tax bills in most cases can not be discharged in a bankruptcy action.

Warning

If you have a tax lien placed on property that has a mortgage against it, the tax lien takes first position amongst the outstanding liens. This means that if the property is sold, the tax debt will be paid first before any other mortgage is paid. Many mortgage lenders consider the placement of a tax lien against your property to be a default on the loan agreement. They can report this as a default on your credit report, giving you another negative credit report entry. The mortgage holder may also begin foreclosure proceedings if a tax lien is placed on your property. Foreclosure is one of the biggest negatives that your credit report can show.