How Tax Liens & Judgment Liens Work

How Tax Liens & Judgment Liens Work

How Tax Liens & Judgment Liens Work

In Summer of 2017, new reporting standards from the National Consumer Assistance Plan were released in relation to both tax liens and judgment liens. In a nutshell, going forward, for either a tax or judgment lien to be reported on your personal credit report, the reporting must include all of the following:

  • Your name
  • Your address
  • Your social security number
  • Your date of birth
  • Required courthouse visits every 90 days to make sure records are updated

This new reporting feature might provide a benefit to millions of Americans, due to having old tax or judgment lien(s) removed from their personal credit reports. (These changes do not affect business credit reports.) However, note that just because a tax lien or judgment is removed from your personal credit reports, that doesn’t absolve you of paying the debt. (You can check your personal and business credit data with a free Nav account and get alerts when negative information hits your reports).

Here is a brief overview of tax liens and judgment liens.

Tax Liens

A federal or state tax lien is a legal right of the government on particular assets and properties after you fail to pay an outstanding tax debt. It can happen to individuals and businesses alike. Note that just because you fall behind paying taxes, that doesn’t automatically get a tax lien.

For a tax lien to manifest, you would have to neglect paying your tax bill, the IRS would send you a “Notice and Demand For Payment”, then you would still neglect to pay the full balance within the time period allowed. From that point forward, a tax lien is generated through the tax authority filing a “Notice Of Tax Lien” in the public record to alert creditors of the situation.

A structured payment plan can be arranged with the tax authorities to pay off the tax lien over time, which is likely to include various additional fees that will bump up the total balance due. If one still doesn’t make payments in full or on time with the payment plan, then there could be a levy of various assets and properties to help settle the outstanding tax debt. It may be difficult to wipe out a tax lien in bankruptcy.

A tax lien will hurt your credit scores significantly  Under federal law, a tax lien might remain on your public record for 7 (or longer) depending upon when payment of the total balance due is completed. The new reporting standards implemented in 2017 and 2018, however, mean that tax liens will no longer be reported

Judgment Liens

Judgment liens are a result of one party (plaintiff) seeking to obtain a legal monetary civil judgment against another party (defendant), as a result of a variety of things, including breach of contract, emotional distress, injury, fraud, theft, and more.

When one of these events occur, the defendant is found to be guilty, and the defendant doesn’t have applicable insurance to cover said event (cases of fraud are usually never covered), then the judgment will be filed against the defendant to cover the associated damages, whatever amount that might be. The judgment is then traditionally reported to the credit bureaus (though that is changing as we describe below). The judgement creditor may also seize property or garnish wages to collect the judgement, depending on state law.

However, unlike many tax liens, judgment liens can often be eliminated through bankruptcy, and some defendants are actually encouraged by attorneys to file bankruptcy if situations such as high judgment liens create a dire financial situation. 

Due to the new reporting standards under the National Consumer Assistance Plan, most judgments will no longer appear on personal credit reports. A judgment lien that is not removed might remain on your credit report for up to seven years, following payment of the balance in full.

Editor’s note: This story was updated April 24, 2018 to reflect changes in credit reporting agency policies.

This article was originally written on January 31, 2018 and updated on April 24, 2018.

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4 responses to “How Tax Liens & Judgment Liens Work

  1. Should I be concerned that my financial advisor has 3 tax/judgement liens which are documented in FINRA pages?

  2. Hi my name is Shirley Bates I had a loan on a house it was a 80-20 loan the house foreclosed the company that had the 80% took properties so now the company that I owe the 20% has came after me looking for payment I made a payment arrangement with them but now they trying to put a judgement lien on my boyfriend’s property because he added me on with a click Quick Claim Deed. What can I do