Small Business Guide

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Small Business Guide

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Invalidating Liens

When battling liens against you, a small business owner may be able to invalidate certain types of liens. Liens that are invalid, of course, cannot impair any assets, whether they are exempt or nonexempt.

Mechanics' liens and tax liens (statutory liens) will be invalid unless they have been filed with the appropriate government office ("perfected"), and then foreclosed on within a certain period of time. The time limitations vary from state to state.

In the case of mechanic's liens, these periods are very short. Typically, these liens must be filed within 60 or 90 days after the work is performed, and then foreclosed on within one year.

Tax liens usually have to be filed within 2 to 3 years, and expire after 10 or 15 years.

Even judgment liens have time limitations. Usually, judgment liens must be foreclosed on within 10 to 20 years.

If any of these liens have not been filed, or foreclosed on, within the prescribed periods, the liens are invalid and unenforceable.

Example

Peter Jones, a Connecticut resident, has a contractor put a $40,000 addition on his residence, but has not yet paid the bill. Jones' residence, worth $120,000 after the addition, is subject to a $100,000 first mortgage.

The residence is an exempt asset in Connecticut under these facts. However, mechanics' liens are valid, even when they impair an exempt asset.

Fortunately for Jones, however, the contractor failed to record his mechanic's lien of $40,000 within 90 days of the job being completed, as required by Connecticut law.

Accordingly, the contractor's lien is invalid and therefore of no consequence. Jones's home is completely exempt from the claims of the contractor.

In addition, the Federal Trade Commission's (FTC) Credit Practices Rule makes invalid any non-purchase-money, non-possessory security interest liens in household necessities such as clothing, appliances, and linens, as well as some items of little economic value to a consumer.

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