Silent Liens and Their Risks to Lenders
Silent liens refer to a lien that is not on any public record. The IRS uses this type of lien to invoke a more aggressive approach to collecting unpaid taxes on the lien when other methods have failed. This can cause many problems for a company, as the IRS does not need to give any sort of warning before seizing property from the individual or company.
When businesses are faced with financial trouble, they often prioritize company liabilities first, such as payroll or vendors, before paying taxes. The obviously wary IRS will then place a statutory or silent lien on the company, which allows them to apply for a loan from a bank without the lender knowing of the unpaid taxes. While a normal lien will drive down the firm’s credit score, a silent lien allows a business to perform its monetary duties without the burden of its poor solvency. A silent lien lasts on average for 446 days, meaning companies have little over a year to settle their tax disputes.
Lenders are put in a precarious position thanks to these silent liens. Even in the best-case scenario, their loan will be used to pay the overlying taxes and keep the company’s credit score stable, but it will still need to perform its market responsibilities in order to pay off the loan. Instead of applying a higher interest rate to a riskier client, banks are otherwise unaware of the underlying uncertainty. The best thing a lender can do is to understand the risks behind using solely public record searches.
When an investor is planning on putting their money into a new asset or security, they are often warned of the perils of using only one method in their analysis. Public records are no different. While they are commonly used to assess the previous performance of a potential client, they do not incorporate the potential downside of a silent lien.
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