When one person owes money to another, the creditor is usually eager to take whatever steps are available to make repayment more likely. One way of doing that is turning a debt into a secured debt by getting a lien, a legal interest in property that belongs to the debtor. This process gives the creditor authority to sell the debtor's property if the loan is not repaid.
Each state sets its own rules about liens, including the different methods of creating liens, and how and when to file them. Those who live in Tennessee will want to get a full understanding of the state's lien process.
What Is a Debt?
Debt is a familiar concept that most people experience. A debt is simply money owed, most often to an individual, a business or a lender. The term used to describe the person who owes the money is the debtor, and the individual or entity to whom the money is owed is called the creditor.
There are lots of different kinds of debt, from cash borrowed from a friend to buy a beer to a six-figure mortgage loan from a bank to buy a house. Many people incur daily debt as they make charges to their credit cards. But debts can also be recurring, like the amount owed every month for a phone plan, apartment rent, electricity bills and gym enrollment.
Some debts, like property taxes, are annual; other debts are structured by contract to be paid off over time with interest. These loans are usually too large to be paid in one payment. A good example is a mortgage loan taken out to buy a home.
How Liens Work
A Tennessee lien represents a security interest in the property of a debtor, and can also be seen as collateral for the loan or debt. This gives the creditor the right to sell the debtor's asset or property to get money owed.
The liened property serves as the collateral for the loan or debt. The debtor is unable to legally sell or otherwise dispose of liened property without paying off the lien holder or getting their permission to sell.
In some cases, notably auto loans, the lender regularly seizes vehicles when the debtor does not keep up with payments. After proper notice of nonpayment, the creditor sells the vehicle to the highest bidder at auction, and the debtor remains responsible for any money owed over and above the amount recouped at auction.
What Is a Lien?
If someone lends a friend $10 because they forgot their wallet, they do not worry too much about getting paid back – they expect their friend to repay the amount. If the debt is not repaid, it may cause a rift between them, but it won't have a serious financial impact.
Sometimes, like with a mortgage or a credit card, the debt is too large to pay off at one time, and the debtor repays it over a period of time with interest.
While many debtors intend to pay their debts, some don't, won't or can't. When a debtor has serious financial problems, creditors may wonder if they will ever see their money. To make that more likely, creditors prefer to take a security interest in a property or another asset belonging to the debtor. This lien turns a regular loan into a secured loan.
Types of Liens in Tennessee
A lien is not available for every type of debt, nor is it necessary. Small debts, or debts within a family, might not be appropriate for a lien, but many other debts are. Tennessee recognizes different types of liens including:
- Deeds of trust.
- Motor vehicle liens.
- Mechanic's liens.
- Garage keeper's liens.
- Judgment liens.
- UCC liens.
Type of Lien
Deed of Trust
Most states use mortgages to secure home loans, but Tennessee, together with a few other states, uses deeds of trust, also called property liens.
Motor Vehicle Lien
Anyone who buys a vehicle with financing generally must agree to a motor vehicle lien. This lien remains on the vehicle until the amount due is paid in full.
If a contractor is not paid for work they perform on a premises, they can file a mechanic's lien on that property to secure the debt.
Appropriate when a mechanic works on a vehicle, but the owner refuses to pay. The mechanic can hold onto the vehicle until the bill is paid.
If a creditor obtains a money judgment against an individual who owns real estate, the judgment can be recorded as a lien against the property.
In a commercial lending transaction, a business can borrow money and give the lender a lien on assets. The lender takes a lien on the assets under the Uniform Commercial Code, or UCC.
Consensual Liens in Tennessee
Tennessee lien laws recognize both consensual and involuntary liens. A consensual lien is a lien that is a condition of a loan. For example, when an individual buys a home, they usually have to borrow money from a bank, financial institution or mortgage lender.
Part of the loan agreement is a deed of trust that allows the creditor to retain a security interest in the property when they lend money to the home buyer.
The creditor will insist on this as a condition of the loan in order to guarantee the underlying obligation. This security interest is a voluntary or consensual lien, since the debtor accepts the lien in order to get the loan. This is also the case with other purchase-money loans like vehicle loans. If a buyer wants financing for a car or a truck, they will almost always have to agree to a lien.
Involuntary Liens in Tennessee
But there are also involuntary liens in Tennessee. These are liens that are established by a creditor who did not lend purchase money to the debtor; the liens result by operation of law.
For example, if someone fails to pay income taxes due to the IRS or to the state of Tennessee, the taxing authorities can place a tax lien on the person's bank accounts or real estate.
The debtor's acceptance or approval of this lien is not necessary or requested, so it is called an involuntary lien. Mechanic's liens, garage keeper's liens and judgment liens are also involuntary.
How to Perfect a Consensual Lien in Tennessee
There is no single way to create or perfect a lien in Tennessee. Each type of lien has it's own rules. Deed of trust liens on real estate in Tennessee are written contracts under which a property owner gives a creditor a lien on a specific piece of real estate.
To perfect a deed of trust, the lienor must simply record it with the Register of Deeds for the county where the property is located. There is a recording fee, but once it is filed, the public is considered to be on notice of the lien against the property.
Perfecting Vehicle Lien Claims
Motor vehicle liens are perfected in Tennessee by placing the lien holder's name on the vehicle's title. Today, these lien notations are handled by the county clerk, although second liens are handled by the Tennessee Department of Revenue.
To record a lien on a vehicle, the creditor must fill out an Application for Noting of Lien, a form available on the Department of Revenue's website. The application must include a copy of the agreement granting the lien and the original vehicle title, plus applicable fees.
Perfecting Business Liens
When a business puts up assets as collateral for a business loan, the lender can require the borrower to execute a security agreement that describes the collateral and agrees to provide the lien.
The creditor can perfect its lien by filing a UCC-1 Financing Statement, often simply called a UCC, with the Tennessee Secretary of State. The UCC is good for five years, but can be extended by filing a continuation statement.
Perfecting Involuntary Liens in Tennessee
Mechanic's liens are involuntary liens and are more difficult to perfect. These liens in Tennessee are sometimes called materialman's or construction liens. They are involuntary liens, created by operation of law in favor of contractors, subcontractors and material suppliers when a property owner has not paid for work performed or materials provided.
As long as a contractor, subcontractor or material supplier worked directly with the property owner on a residential project, they are eligible to place a mechanics' lien on the property for nonpayment.
Providing Notice of Contractor's Lien
Although the lien is said to arise automatically, the contractor can't just sit on their hands. Subcontractors and materials suppliers must provide notice to the property owner or prime contractor, depending on the circumstances.
This must be done within 90 days after the last day of performing work or providing materials to the construction project. The notice of lien includes:
- Lien holder's name and the address to which the owner of the property or general contractor may send communications.
- General description of the work or materials provided.
- Amount owed as of the date of the notice.
- Statement of the last date work was performed or materials were provided.
- Description of the property against which the lien is claimed.
The lien should include only the unpaid balance and no extra items like attorneys' fees, interest or late charges. The lien remains on the property for one year. If the lien is not paid off during that time frame, the lien holder must file a lawsuit to enforce the lien, or it disappears.
Tennessee Garage Keeper's Lien Rights
A garage keeper's lien is similar to the mechanic's lien, but intended to protect mechanics. If a Tennessee auto mechanic works on a vehicle and isn't paid within 30 days, they have the right to a lien on the vehicle for the value of the labor, parts and storage fees. To recoup this amount, the lien claimant can sell the vehicle. To perfect this lien:
- Tennessee mechanics must submit a Vehicle Information Request Form to the Department of Revenue with an itemized list of charges on business letterhead. The state must then provide information about the vehicle to the mechanic.
- Mechanics must provide written notice to vehicle owners and anyone listed as a lien holder.
- Mechanics must send this notice by registered mail, or by hand delivery with a notarized affidavit of service.
- Notice must include a description of the vehicle and an itemization of charges.
- Notice must tell the owner that they have 10 days from the date of delivery of the notice to pay the charges and recover their vehicle. If no response is received, the vehicle can be auctioned off.
Mechanics must advertise the sale of the vehicle in a local newspaper in Tennessee at least 15 days before the auction or post notice in at least six conspicuous places at least 10 days before the auction.
Real Estate Judgment Liens
A judgment lien is a lien on real estate. Tennessee lien statutes provide for this lien to arise whenever a creditor obtains a money judgment against a property owner. The creditor records a certified copy of the judgment in the county where the property is located. This encumbrance remains attached to the property until the judgment is satisfied.
- Tennessee Department of Revenue: Garagekeeper's Lien
- The Law Office of Timothy H. Nichols, PLLC: Tennessee Mechanics' Liens: The Basics
- Tennessee Courts: Rule 69. Execution on Judgments
- Rochford Law & Real Estate Title: Tennessee Mortgage Information: Who Signs the Mortgage and What to Expect
- Tennessee Secretary of State: Financing Statement Instructions (UCC1)
- Justia: Tennessee Code, Title 66, Section 66-11-145
- Some courts have online forms that you can file for a lien. Search the courthouse's website before you begin, or ask the clerk if there is an online filing method.
- Get an attorney to help represent you. If you're really determined to collect your debt then a lawyer that knows the law in and out for liens and civil suits is an invaluable ally.
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.