In brief:
- A lien is a public legal claim to ownership of an entity’s assets if that entity defaults on their debts or other obligations.
- You can put a lien on a business to protect your investments with it, either through a contractual clause or after winning a civil lawsuit against the business.
- Checking that a lien is filed correctly not only helps you confirm your investments are insured, but also lets you evaluate the risk of dealing with a business that has liens filed against it.
If a person or business doesn’t pay money they owe – or fails to fulfill some other legally-binding obligation – within a certain time frame, they can have a lien placed against them. This gives a creditor the legal right to claim ownership of the entity’s assets, and use them or sell them to pay off what is owed.
As a financial institution or other lender conducting risk assessment, knowing about liens on a business is key. They can be warnings that you won’t be able to recover what you invest in that business if it defaults. By the same token, however, you can place a lien on a business as a way of giving yourself priority for being compensated if the business can’t (or won’t) repay its debts. This article discusses how to put a lien on a business, as well as how to check if a business has a lien against it.
We’ll begin by explaining what a lien is, and why financial institutions should know whether or not the businesses they work with have one.
A lien is a legal claim to ownership of a person’s or business’s property in the event the person or business fails to pay a debt, or meet some other type of obligation, by a certain date. Liens can be placed as part of a consensual contract, as a function of law, or as part of a court judgment.
In the context of B2B due diligence, a lien can be a risk signal, so it’s important to ensure you access a lien data report and do a thorough search to conduct proper KYB & KYC processes. A lien may indicate that a business could lose critical assets needed to run its operations if it doesn’t pay its debts on time.
Your risk assessment team will likely question what to do if a customer has a business lien. A lien can represent risk by impeding a business’s ability to get further financing, as it may lower the business’s credit score. Also, a potential creditor will know that a business’s assets have already been legally claimed by other parties in the event of a default. Thus, the creditor is less likely to invest in the business because of the high risk of not being able to recover all of its assets if the business defaults on its debts.
A lien is a way to protect your investment in a person or business if they default on their debt to you. It gives you priority in possessing and/or selling off an entity’s assets to recoup what they owe you. This means you get compensated before shareholders, as well as those who file liens later.
Say, for example, you operate a fintech or other financial service. You lend money to a construction company for it to buy the equipment it needs to complete jobs. But along the way, something doesn’t go as planned. Maybe the company has trouble getting jobs. Maybe someone inside the company misappropriates the money. Or maybe the company gets in some other kind of legal trouble.
Whatever the case, if the company doesn’t pay back the money you lent on time, you may have to file a lien against it. This gives you legal priority and authority to seize and/or sell the company’s assets until you’ve recovered the value of the loan.
Yes, people and even other companies can put liens on a business if the business owes money or other assets. Sometimes a business will voluntarily accept a lien to secure financing or other investment. Other times, liens must be granted and/or enforced by a court order.
There are two general scenarios for putting a lien on a business:
- Consensual lien – This is where a business comes to you wanting to borrow money or other assets in order to run its operations. In this case, the business usually agrees to a lien as part of the lending contract. This is also known as a voluntary, contractual, or security interest lien.
- Judgment lien – This is where a business owes you money or other assets (such as for mechanical work on their property, in the case of a mechanic’s lien) but fails to pay in a timely manner. In this circumstance, you can file a lien against a business by taking the business to civil court and providing evidence that it hasn’t fully repaid a debt to you. If the court rules in your favor, you can place a lien on the business, allowing you to seize and/or sell off the business’s assets to repay the debt it owes you.
Unless a business agreed to a lien in the initial contract you negotiated with them, you generally need the help of the courts to place (or enforce) a lien on that business. Here’s how to file a lien against a business.
1. Understand your eligibility for filing a lien
Generally, filing a lien on a business requires you to win a judgment against that business in civil court. But in the US, each state has different rules surrounding how to file and maintain a lien against a business.
For example, you can typically only put a lien on a business’s assets if they’re located in the same state where you won the lawsuit. Also, in certain states, there are time limits on how long the lien can be enforced. If the lien isn’t executed within that time period, it may need to be renewed.
2. File and win a lawsuit against the business in civil court
You need legal backing to place a lien on a business (or enforce it). That means you have to go to civil court and provide evidence that the business both owes you money (or other assets) and hasn’t paid you back in full yet. The business will get a chance to dispute your case, and then the court will render a verdict. If the court rules in your favor, you can move on to the next steps.
3. Fill out and submit the required documents
Next, you need to find out what documents you need to submit for filing a lien against a business, where to submit them, and how much it will cost.
Different US states have different forms to fill out or offices to submit to, depending on whether you’re placing a lien on real, personal, and/or financial assets. For example, you may have to submit to:
- The clerk’s office in the county or counties where the business’s property is located
- The DMV in the state(s) where the business’s vehicles are registered
- Any banks the business deals with
Some states and offices also require you to submit a certified copy of your court judgment. You can get this from the court’s clerk for a fee.
Usually, mailing the relevant documents and fees to the correct offices is sufficient. However, you may want to make the filing in person to be able to immediately fix any mistakes on your forms, and to confirm that the lien gets recorded properly.
4. Execute the lien
Once the lien is in place, the business will be unable to freely transfer ownership of the assets listed in the lien. If the assets are sold, the proceeds will be used to cover the outstanding debt to you. You also have the legal right to seize ownership of the listed assets and sell them or otherwise use them towards paying off the debt in full.
Throughout this complicated process, it’s important to make sure you are doing everything you can to automate your digital lending risk assessment program, and using the correct data sources and APIs to help speed up the process.
Filing a lien is a public declaration that you have a legal interest in an entity’s property because they have an unpaid debt – or unfulfilled obligation – to you. However, there are times when the public nature of a lien can be disadvantageous to you as a lender or other financial institution.
Say, for example, there are competing institutions that lend to the same types of businesses as you do. Or perhaps they simply want to find out what kinds of clients you have. Since liens are publicly recorded, your competitors could look up any that you’ve filed and check which specific people or businesses you’ve filed them against. Your competitors could then approach these entities and offer them more favorable lending terms, thereby potentially stealing your customers.
If you mask a lien by filing it through another company (like Middesk, for example), then your competitors won’t be able to immediately tell that it was specifically you that filed the lien against an entity. They would have to contact the other company, which would then communicate the request to you (the actual lender) for you to decide whether or not to respond to it. Thus, finding customers through searching for liens becomes an inefficient strategy.
There are a couple of ways to find out whether or not placing a lien on a business has been done correctly – either by you or by another entity. Here are the available options for checking that a business lien has been officially recorded.
1. Use a third-party business verification service like Middesk
The most efficient way to ensure a lien is filed correctly is to use a search tool that has direct links with all places where liens would be officially registered: Secretary of State offices, state/county recorder’s offices, and the IRS. So you can not only search all of these databases at once, but also have more flexible options available for finding what you’re looking for.
Learn how our Assess product reduces manual reviews by offering a complete view of UCC lien origination details, amendments, and history on businesses and individuals, and can find other risk signals, such as litigation and bankruptcy records.
2.Search for it at a Secretary of State office
Secretary of State offices usually contain most registration information on businesses, as businesses typically register at the state level in the US. That information often includes any liens filed against the business, so you can check if they’ve been correctly filed here by conducting a UCC lien search. You can do so through the SoS’s online portal, or by filling out and mailing a UCC-11 form to the office.
Each SoS office has to be searched one state at a time, though. And each one functions differently in terms of interface, account registration, and fees required. Additionally, you may not find the information you’re looking for at a SoS office because the lien was filed at a different level of government, the business was registered in a different state, or the assets the lien was placed on are located in a different jurisdiction.
3. Inquire at a state or county recorder’s office
Sometimes, if a lien hasn’t been filed with a Secretary of State office, it may have been filed with a state or county recorder’s office. Some states allow you to search through all of their county recorder’s offices at once from a centralized database. In other states, you will have to check each county’s recorder’s office one by one.
In the latter case, you may run into several roadblocks to finding the information you need. One might be that the lien is filed against a business owner instead of the business itself. Another could be that the business owner may live in a different jurisdiction than where the business is registered or operates. A potential third one is that the assets the lien was placed on are located in a jurisdiction different from that of the business or its owner(s).
Accounting for all of this can be time-consuming and costly in terms of registering for accounts, paying fees, and running searches.
4. Send a Freedom of Information Act request to the IRS
If you’re looking specifically for tax liens, you can go straight to the primary tax authority in the US: the IRS. It records tax liens from all 50 states (including DC) in its Automated Lien System (ALS) database, and you can request a copy of this database by invoking the Freedom of Information Act. You can make this request online, by fax, or by regular mail, and as of 2023, there are no fees associated with doing so!
However, the IRS can’t guarantee the completeness or accuracy of this information for a couple of reasons. First is that the database doesn’t represent the official legal filings of federal tax liens, so some details may be missing. Second is that this database only gets updates quarterly, so there’s a significant amount of time for the information to become stale before it’s refreshed.
Finally, the information is delivered in a Compact Disk (CD) format, so you’ll have to have a device that can read CDs.
Automate lien research and management with Middesk
While Middesk’s Assess product speeds up the process of determining if a business has a lien officially registered against it, our Lien Filing product helps streamline filing liens yourself. Middesk takes care of the complexities of filing and terminating liens across all 50 US states. That means your risk and underwriting teams can focus less on manual work and more on higher-priority tasks.
Automate lien searches during customer onboarding to more quickly and accurately assess risk. Automate lien filing to speed up a complex process and mask liens to avoid attracting your competitors to your customers. Middesk can do both of these things for you; book a demo with us today to see how.
