One financial issue you’re likely to deal with in a divorce is the disposition of your family home. Because the home is such a valuable asset in most divorce settlements, it can become the target for legal actions such as liens. These liens must be resolved before you or your spouse can claim a clear title to the property.
Here’s what you need to know:
What is a lien on a property?
Property liens are typically associated with a specific piece of real estate. The lien is put in place by the creditor or the lender that extended financing.
The lien is the creditor’s legal claim that provides them with legal protections and rights in the event a property owner does not pay their obligations on time.
When a lien is placed on a property, it encumbers the property. It means the owner cannot legally, sell, refinance, or transfer a clear title of ownership. The lien also serves notice to the world that the property is not free and clear.
There are different kinds of liens that can be filed by various entities – but all have the same general effect.
For example, a tax lien may be filed by the IRS for unpaid federal taxes or by the Franchise Tax Board in California for unpaid property taxes.
A Notice of Lien is filed through the County Clerk or Recorder’s office. With a commercial property, the lien is also recorded with the secretary of state. The IRS and the county tax assessor can also file liens for unpaid income and property taxes as well.
How do liens affect your property?
A title report will show if there are any liens against your property. It’s critical to know if there are any outstanding issues related to the title before attempting to divide your interests or refinance the property during or after a divorce.
A clean title report will show that no liens exist, that all liens have been paid in full, that a creditor has agreed to float the debt through a subordination agreement and that an escrow company can issue a current title policy.
From a personal point of view, a lien that shows on your credit report could cause you considerable difficulty in securing financing or obtaining credit in the future.
How to find out if my house has any liens during a divorce?
Liens are recorded against the title of a house. As such, you can check with the county recorder, county clerk, or assessor’s office in your county to see if any such encumbrances exist.
You may also choose to contact a title company that can also do the work for you. Ask them to check a copy of your title report for liens or any other irregularities.
It’s also worth noting that you may not be informed when liens are tagged to your property. Clouded title to the property can often be a big surprise to owners and sellers sometimes. This is another good reason to be proactive related to making sure you have clear title.
Can my spouse put a lien on the house during a divorce?
Yes. In a divorce settlement, to protect property interests, a spouse may place a lien on community property to ensure their financial interests in the property are protected.
Likewise, if a judge awards title to the marital home, you can also request that a lien be placed on the house in the amount of equity that you are owed.
Also, in a community property state such as California, a spouse can have debts from other creditors, and those creditors may be entitled to place a lien on a property you own jointly with your spouse as a means of satisfying the debt.
What are the liens to be aware of in a divorce?
There are several possible types of liens that can be filed in a divorce. In addition to a property lien which we have already discussed, other possible liens include:
This is a lien that is attached to your real estate or personal property without your agreement. When someone wins a lawsuit against you, they will often record the judgment against your property.
A judgment lien affects real estate you own in the county where the creditor records the lien, or where the court enters the judgment.
They can also be attached to properties that you acquire at a later date. For example, if a lien is filed against you and you don’t own any property but later buy property in that county, the lien will pop up and be attached to your new purchase even though it is after the fact.
When you buy a property jointly with your spouse, in California, you are entitled to 50% of the equity in that house or an equal amount of assets per state community property rules.
If a spouse receives the home in a divorce that was once owned by both parties who both helped build equity in the house, the out-spouse can retain their claim on their share of the home’s equity through a divorce lien.
If you are the out-spouse, you can request that a judge create a divorce lien against the property for the amount of equity you are entitled to receive. This protects your interests in the home and creates an encumbrance that must be satisfied if your former spouse decides to sell the house before all settlement terms are finalized.
This is a common practice in a divorce when one spouse is awarded the family home, but they are not able to refinance the home so that equity can be divided.
A marital lien is placed on the house so that the spouse who vacated the home ensures that they are paid at a future date.
These are executed when there is a question about what is separate property vs. community property in a marriage. In some cases, people who get married may already own property, which is theirs alone (i.e. separate property).
If the other spouse did not contribute to increasing the value of the separate property during the marriage, they may not be entitled to any of the benefits. However, when this issue is in dispute, a community lien may be filed to determine exactly which spouse, or if both spouses have a shared interest.
The lien prevents the property in question from being sold or transferred until this issue is decided.
Can my attorney put a lien on my house for legal fees?
Contracts between an attorney and client in California often include provisions that provide the attorney with the right to place a “charging lien” on property owned by the client to ensure the payment of fees.
Charging liens are sometimes referred to as “secret” liens because they take effect and are perfected upon execution of the contract creating the lien. If an attorney files a lien against a client’s property, they will also file and record the notice in the county where the property is located, although it is not required.
When an attorney files a lawsuit affecting title or possession of real property, they will also file and record a Lis Pendens. This is a Latin term for “notice that there is a lawsuit pending” and is formally known as a “Notice of Pendency of Action.”
A Lis Pendens gives notice to the public at large that a property has a lawsuit pending that could affect whether or not the owner of record has the right to sell it, lease it, put it up as collateral for a loan or otherwise transfer it.
However, prior to filing a charging lien, in California, clients are always entitled to arbitrate fee disputes with their attorneys upon the client’s request. If you prefer to go this route, contact your local bar association regarding how to request fee arbitration.
How do I get rid of a lien in a divorce?
There are several ways.
- You can dispute the validity of the lien, engage in a legal battle with the creditor, and win the dispute.
Instead of disputing the lien, you may also be able to negotiate with the lien holder and come up with payment terms that are mutually agreeable to both parties.
2. If the lien is valid, you can pay it off and the lien will be removed.
If you have a divorce lien, you can negotiate payment several different ways be executing a promissory note. The note will outline terms of the arrangement, including how much your former spouse owes you, how much interest your former spouse must pay on the equity, and how that interest will be compounded. A promissory note can either be paid in a lump sum or through regular interval payments.
3. You may require that the lien be paid off in full with proceeds from the sale of the house either now or at a future date.
Government holders of liens like tax or IRS liens should automatically send you a lien release once the debt has been paid. If you don’t receive one within 30-60 days of final payment, contact them to see when you can expect to receive it.
In some cases, a lien is structured so that you can sell it off to a third party.
The third-party will pay you cash as the out-spouse, and they become the lien holder. When your spouse pays off the lien, they will pay the third party instead of you.
This option can be a bit complicated, and it may be best to have an attorney help you through the process to make sure this is valid.
4. Another way to resolve a lien is to refinance the property and pull enough cash out of the home to satisfy the payment of the lien.
This may work best when you want your equity immediately but your spouse wants to keep the family home.
The home’s value must exceed the amount of the new mortgage for your former spouse to successfully cash out the equity. Not only does refinancing provide you with immediate cash, it also removes your name from the mortgage loan and officially relieves you of monetary obligations related to the home.
Liens are not always automatically removed. In some cases, you need to insist that a lien release will be signed before the final payment to satisfy a lien is made. Also, lien releases must be notarized for the county to accept them.
What if I can’t afford to pay a lien in a divorce?
Whether it relates to a divorce or not, a lien against a property you own will most likely also be recorded by credit monitoring agencies such as Equifax, Experian, TransAmerica or others.
When this happens, it affects your ability to get a loan and can also lead to a foreclosure or short sale on the property. In some cases, you may also need to file bankruptcy which will have extremely long-term negative impacts on your creditworthiness.
When the property is sold by any of these methods, the creditor will be paid first before you receive any proceeds from the sale. In some cases, a lien also gives the creditor leverage to force the sale of the property so that they can be paid.
If the sale of the property does not fully satisfy the lien, then you’re not off the hook either. While the lien will be retired on that property, the remaining lien amount will remain intact for any other property that you may own in that county.