Liens and judgments can have a negative effect on your credit score, so it’s important to understand them. You should check your credit reports regularly — in part so you know what lenders are seeing. Plus, if you find that you have a judgment or anything else being reported incorrectly, you can submit a dispute to the credit bureaus asking for the item to be corrected or removed.
What are liens and judgements?
A mechanic’s lien is a legal claim on your property because you failed to pay money owed. Say you don’t pay a mechanic or contractor for their work, they can place a lien on your vehicle or home. A tax lien can be placed on your property by the IRS and state and local governments for unpaid tax bills. Lastly, a judgment is when a creditor or collector sued you over an outstanding debt and won, and it represents a legal obligation to pay a debt.
Can I dispute liens and judgements?
To remove a mechanic’s liens from property records, you can negotiate with the person who placed the lien (the lienor) to remove it, get a lien bond from an insurance company that covers the amount of the lien, or dispute the lien in court.
For a tax lien, you can apply to the IRS for a withdrawal, which removes the public notice of the lien but not the obligation to pay your unpaid taxes. To apply, fill out Form 12277, Application for the Withdrawal of Filed Form 668, Notice of Federal Tax Lien. Be sure to include the names and addresses of any credit bureaus you want notified.
For judgments, in certain circumstances, you can ask the court to reopen a judgment, or you can formally file an appeal.
How do liens and judgements affect my credit history?
Because a lien is part of your payment history, which accounts for 35% of your credit score, it can significantly affect your credit. A paid lien can remain on your credit report for up to 7 years, and an unpaid lien stays for up to 10 years after it was originally filed.
It’s helpful to know that, in July 2017, Equifax, Experian, and TransUnion, announced that they no longer report liens that don’t have the minimum identifying information, including Social Security Number or date of birth. They did this voluntarily because public lien records weren’t being properly verified or updated, resulting in many errors and consumer disputes.
Judgments, whether paid or unpaid, are considered derogatory entries on your credit. Most remain on your credit report for up to 7 years from the date it is filed by the court.
How do lenders view me if I have liens or judgement?
Lenders may be less likely to take on the risk of lending to you if you have a lien or judgement on your credit report. Some lenders may be willing to accept the higher risk and give you a loan, but they’ll likely qualify you for higher rates and less advantageous loan terms. Lenders view tax liens less harshly if you have an acceptable repayment plan with the IRS and have made on-time payments for at least the last 12 consecutive months.
One mistake doesn’t mean your credit is a lost cause
A damaged credit report can heal if you establish a new pattern of meeting all your payment obligations, including taxes, mortgage or car payments, or credit card balances. Another bright spot is that liens and judgements may affect your credit less as time passes, and more recent positive information on your credit report can help your score. So if you’ve had a mistake in the past, don’t give up!
Easily stay on top of your credit history
Monitoring and building your credit is easy with free Credit Monitoring from MoneyLion. You can also use our free Credit Simulator tool that lets you explore how your decisions and actions can affect your credit.