Lien

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What Is a Lien?

A lien is a legal claim or legal right against an asset such as property. Liens are typically used as collateral to satisfy a debt. This action provides security by giving an organization or individual the right to take possession of an asset or to take legal action to satisfy obligations or debts. A lien acts as a guarantee of an obligation, such as repaying a loan. A person or organization that files a lien is known as a lienholder.

A lien can be established by a creditor or a legal judgment. If the obligation isn't satisfied, a creditor may have the ability to seize the asset that is the subject of the lien.

Types of Liens

Various liens exist to secure assets. Liens are generally part of agreements to purchase real or personal property such as homes or auto loans. In situations where someone has a legal right to another person's property, this type of arrangement could qualify for a lien. Examples of liens include the following:

  • Home loan
  • Auto loan
  • Judgment lien
  • Mechanic's and construction lien
  • Tax lien

Home Loans

The property you buy serves as collateral when you borrow money to purchase a home. A loan agreement will include your agreement to allow your lender to foreclose on your property if you don't meet stipulated requirements. Requirements you need to fulfill may include the following:

  • Insuring the property
  • Making monthly mortgage payments
  • Living in the property as your primary residence for a specific number of years

Auto Loans

You may take out an auto loan if you buy a vehicle through financing. If you get a vehicle title loan, a type of secured loan in which borrowers use the vehicle title as collateral, you can file a lien with your state's department of motor vehicles (DMV).

An auto lender can take your vehicle from you if you don't meet the requirements of your auto loan. This process is known as vehicle repossession .

Judgment Liens

Someone may become a creditor if he or she wins a lawsuit against you. When a creditor can't immediately collect, the individual may have the right to file a lien against property you own. This lien ensures that you will eventually pay the damages when you can't immediately pay out of pocket.

Mechanic's and Construction Liens

Contractors who are performing work on your property expect that you will pay them. If you don't pay your contractors, these workers can file a mechanic's lien with your local municipality recorder's office. Mechanic's liens may also be filed if a contractor does not pay subcontractors.

Tax Liens

Your local government or the IRS may collect unpaid taxes with liens. Taxing authorities may attach liens to both current and future assets. Tax authorities can also collect from bank accounts before other creditors can. In fact, the IRS usually has the right to collect before your other lenders. Bankruptcy doesn't always discharge unpaid taxes either.

Image via Flickr by jongorey

Outcomes to a Loan That Includes a Lien

When you buy a product through financing, you consent to a lien. A lien on a vehicle loan is an example. The vehicle is the collateral in this case.

If you buy your vehicle from a dealer and secure it with a loan from your bank, the bank will put a lien on the vehicle and hold the title. This action gives the lender — your bank, in this example — a security interest in your property. The lender keeps ownership of the vehicle. If you default on your loan, or fail to pay, the lender may sell your vehicle to recover the amount of your loan.

When you take out a loan that includes a lien, you'll have one of three outcomes:

  • You make all payments and pay off the loan . In the example of the vehicle, your bank would release the title, and the lien would be removed.
  • You stop making payments . Continuing with the vehicle loan example, the bank would hold the title of the vehicle until someone purchases it. This action would release the original lien, and the lien would no longer exist.
  • You try to sell the property while you still owe money to the lender . In the case of the auto loan, your bank would still hold the title to the vehicle. As a result, you would need to pay off your bank to release the lien and obtain the title to sell the vehicle.

How Do Liens Benefit a Creditor?

Liens provide certain benefits to a creditor, whether they are currently lending you something or they are considering lending to you in the future.

  • Current lenders : If you don't repay your debt, a lien may give the current creditor the legal right to take possession of your property and sell your property.
  • Potential lenders : If you want to get a new loan, a potential creditor will see that existing claims are connected with your property since liens are public records.

Current Lenders and Creditors

If you're promising to repay a lender, a lien provides added security. For example, when you're buying a home, a lender doesn't have much leverage if you stop making payments on your house. The lender can file certain documents with your local government to become a lienholder for your property, thus securing the debt and making it more likely that you will repay the loan.

Potential Future Lenders and Creditors

Existing debts need to be paid first. A potential new lender will know that you will need to take care of a lien before you can pay back your lender. A lien, therefore, can make selling a property before clearing up the lien difficult if almost impossible. Liens will also usually prevent you from selling or refinancing the property, such as a home or automobile, unless you pay off outstanding debts as part of the process.

Release of Lien

If you want to sell property you own , you would need to get a release of lien against it. You will have difficulty selling property unless you resolve requirements of the lien to release it.

Generally, a lien can only be released by the organization or person who created it. However, some actions you can take may release the lien including the following:

  • Paying off the lien
  • Settling the lien
  • Correcting the lien
  • Disputing the lien

Paying Off the Lien

If a lien is legitimate, your only option may be to pay off your debts. Liens may be removed when a home or financed vehicle is sold.

Settling the Lien

If you don't have enough money to pay off your debt, you can attempt to negotiate the lien. Sometimes creditors are willing to accept less than the full amount you owe to get some funds immediately and not worry about the loan any longer.

Correcting the Lien

In some cases, a lien may not be legitimate. Contact the lienholder if you believe this situation is the case for you. A lien release could possibly be lost or forgotten.

An example of when this scenario might occur is when buying a used vehicle from someone who previously had an auto loan. The lien release might not be detected in this transaction. If you bring up the issue with the correct person, calling attention to the lien might be all you need to do to resolve the lien.

Disputing the Lien

You may need to bring legal action in case of a disagreement against the lienholder to have a lien released. You can investigate whether claims are still valid. Liens may expire after several years.

If you have questions about a lien, consult with an attorney to clarify your situation.

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