The Effects of a Lien on a Property on Your Credit Rating

If you do not pay your debts voluntarily, your creditors have the right to seek legal recourse against you to collect the balance you owe. If the court sides with a creditor, it often grants the creditor a legal judgment which, in turn, gives the company the right to attach liens to property you own. Not only does this process give your creditor a security interest in your property, it also has a negative affect on your credit rating.

Consumer Misconceptions

A common misconception concerning creditor liens is that these liens damage your credit score by showing up as derogatory entries on your credit report. In reality, liens are not inherently negative items. A mortgage lien, for example, is a lien you enter into voluntarily. Making timely payments to your mortgage lender helps, rather than hinders, your credit rating. A property lien by itself does not appear on your credit report and has no impact on your credit score. The circumstances surrounding the lien are what determine whether or not your credit will suffer.

Judgment Record

A creditor does not need your permission to place a lien against your property provided it has a court ruling permitting it to do so. This court ruling, known as a judgment, is obtained when the creditor wins a lawsuit against you. It is the judgment, not the lien, that damages your credit rating.

When the judge hands down a ruling in favor of the creditor, that ruling becomes a part of the states public record. While not all public records appear on your credit report, derogatory records, such as judgments, typically do. When the credit bureaus enter a judgment into your credit file, you can expect your credit score to drop.

Degree of Damage

While a judgment is a severe negative mark in your credit file, there is no way to estimate how much damage it will do beforehand. This is because the exact formula used to calculate credit scores is a carefully kept secret. Because everyones credit information differs, one persons credit score may plummet after a judgment while anothers may suffer only moderate damage.

Time Frame

While the Fair Credit Reporting Act restricts most derogatory credit information to a reporting period of no more than seven years and 180 days, judgments are a exception to the rule. The amount of time the judgment remains in your credit file depends on how long your state gives your creditor to enforce its judgment. If the judgment enforcement period is less than seven years, the judgment will appear for a minimum of seven years. If the enforcement period is longer, the judgment appears for the duration of the enforcement period resulting in the judgment lingering within your credit file for much longer than other negative items.

You can generally remove a lien from your property by paying off the debt that created it. Paying off the judgment, however, does not result in the credit bureaus removing it from your credit record.