If you receive a notice that a lien has been filed on your property, you may wonder how it will affect your credit score and your ability to borrow money or get credit. Mechanics liens are different from other collection instruments, so they are treated differently when it comes to reporting on your credit history.
What is a lien?
There are several different types of property liens, which are legal claims against the property held by a debtor. Contractors and other businesses in the construction industry can file a mechanics lien if they aren’t paid for their work – even if they weren’t hired directly by the property owner. This is a type of involuntary lien, because the property owner doesn’t have to give consent for the lien to be placed on their property. In contrast, a mortgage is a voluntary lien, because you sign papers giving the bank a lien on your property until you pay off the balance and interest.
Once a valid mechanics lien is filed, the property owner must pay the amount owed, or the claimant can file a lawsuit forcing them to sell the property or building to satisfy the claim (this is known as the foreclosure process).
Liens are available in all 50 states and are included in each state’s laws (and in some cases, the state constitution). Each state has different rules that govern the lien filing process, including notice requirements, filing deadlines, and expiration dates. If a contractor doesn’t follow the rules, their mechanics lien may be invalid.
How credit scores are calculated
Credit scores are calculated based on a number of financial factors, and the calculation depends on whether it’s for a personal credit score or a business credit score.
According to FICO, personal credit scores are calculated based on credit data reported by vendors who grant you credit or lend you money. It’s generally based on five categories of data:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Credit mix
The score is based on both positive and negative information provided by your creditors. How important each category is depends on the person and how long they’ve had a credit history. Credit bureaus can collect public information from state and county courts, including bankruptcies. Overdue debt that has been sent to collections also influences your score.
Business credit scores come from various credit rating companies, like Dun & Bradstreet, EquiFax, and Experian. Each bureau calculates a business’s credit score differently.
For example, Dun & Bradstreet provides three business scores: a Paydex score, commercials credit score, and financial stress score. EquiFax also provides three business scores: a payment index, a credit risk score, and a business failure score.
Although they call them different names, the scores measure similar information. The Paydex, or payment index, measures a business’s past payment history and assigns a score based on whether you pay regularly or don’t. The next score, called the risk score or credit score, looks at your potential payment activity and predicts whether you will become delinquent in the future. Finally, the failure score or financial stress score measures the likelihood that your business will close within a short period of time.
Does a lien affect credit scores?
So can a lien affect your credit score? It depends. Because each state handles mechanics liens differently, and each credit bureau looks at different information to determine your credit score, it’s not possible to give a blanket answer to this question.
“It’s hard to know exactly when a lien could hit a credit report, considering whether the lien will be reported for credit scoring will vary for each individual situation,” says construction lawyer Matt Viator.
“Of course, if the overdue bill is passed along to collections or if the lien is foreclosed, this would very likely result in a negative mark against an owner’s credit report. But whether the mere filing of a lien will affect a credit score will depend on whether the lien is reported to or found by a credit agency.”
Note that Experian and other credit agencies specifically state that mechanics liens may be included on their collection’s reports.
“Any legal financial-related data (judgments, liens, garnishments, etc.) that is public record can be included in a credit report,” says construction lawyer Nate Budde. “The nature of mechanics liens, though, and the variances with the ways different counties record and/or report them, makes it difficult to always determine whether such a lien will be noticed by credit reporting agencies or included on a report.”
It’s important to note that though the lien may not show up directly in a credit report, a company’s payment reputation can be affected by a mechanics lien.
When a mechanics lien is filed, it often cites the property owner and the hiring or general contractor. When a lien is filed, it becomes a matter of public record — which means anyone seeking out that kind of information can access it. Because the lien is connected to the contractor, it can affect their ability to secure credit with vendors or financial institutions.
[Pullquote: “Any legal financial-related data that is public record can be included in a credit report.” – Nate Budde, construction lawyer)
Negative credit events, like bankruptcies, foreclosures, and lawsuits, can stay on your credit history up to seven years after they are satisfied. This means a lien could potentially affect your ability to secure financing for years to come. However, if one of these events shows up on your history in error, you should act quickly to correct the information with the appropriate credit bureau.
Since 2018, tax, judgment, and mechanics liens are not included in the personal credit reports from the three consumer credit bureaus (Experian, TransUnion, and EquiFax).
How to remove a lien
There are a few ways to remove a mechanics lien when it’s filed on your property.
- Pay the contractor the money owed.
- Dispute the lien if it’s invalid or the claimant did not preserve their lien rights correctly.
- Force a foreclosure by sending a notice to foreclose, giving the contractor less time to file a lawsuit.
- Let the lien foreclosure deadline pass, which usually removes the lien if the contractor doesn’t foreclose on it.
- If the lien resulted because the GC or another contractor failed to pay a sub or vendor, apply some pressure to get the non-paying party to pay.
- Bond off the lien to remove it from your property and force the contractor to file a claim against the bond.
Preventing mechanics lien claims
Both owners and contractors can prevent mechanics liens by following a few good business practices.
Property owners can:
- Prequalify general contractors and check their payment history
- Require the general contractor to collect lien waivers with each pay application
- Issue joint checks
- Require a payment bond for each project
- File a notice of completion when the project is substantially complete
- Pay on time and in full
- Choose projects wisely and research the owner’s payment or credit history
- Send preliminary notices on every job, whether required or not
- Send conditional lien waivers with each payment application
- Send invoice reminders
- Send demand letters when payment is overdue
- Send a notice of intent before filing a mechanics lien
Mechanics liens should be taken seriously, even if they don’t directly affect your credit score. They can still affect your ability to borrow money or get credit in the future. Owners and contractors can prevent mechanics liens by properly researching companies they do business with and paying on time and in full.