What is a Lien and How Is It Used to Secure Debts?
Organizations that extend credit to individual consumers and businesses have a number of tools they can utilize to ensure debts are paid. One of those tools is known as a lien. Depending on your financial circumstances, you may have experience with liens and not even know it. You definitely have experience if you have a mortgage on your house.
Liens are used to secure debt in the event that a debtor fails to pay. However, the lien itself is little more than a legal claim. Making use of it requires action on the creditor’s part. That action can be any number of things, depending on the type of lien you are talking about.
Definition of a Lien
Let us start by defining exactly what a lien is. The Investopedia website offers a pretty clear definition for those who understand legalese. Here’s how they define a lien:
“A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt.”
When a creditor files a lien, it is filing a legal claim against someone else’s property. Your mortgage lender filed a claim against your house on the very same day your mortgage closed. That claim gives the lender the legal right to take and sell your house if you fail to make your monthly payments.
The mortgage lien is the lien that most of us are familiar with. When a mortgage lien is filed, it is attached to a property deed and entered into the public record. Any title company searching a property’s history can see any and all outstanding liens.
You might also have experience with another type of lien if you have an outstanding car loan. Just as your mortgage lender placed a lien on your house, the bank or finance company that loaned you the money to buy your car has placed the lien on that car. It accomplishes the same thing.
Should you fail to make your monthly car payments, the lender can repossess your vehicle and sell it. Proceeds from the sale would go toward paying your debt. If the sale does not generate enough money to pay the loan in full, you would be responsible for paying the balance out-of-pocket.
Liens on Judgments
Next up, liens can be placed on certain assets after a judgment is entered against you. Salt Lake City-based Judgment Collectors says that these types of liens are typically obtained against real estate. However, other assets are also up for grabs. A creditor or collection agency could put a lien on a debtor’s boat, private plane, etc.
Liens are a big part of doing business in the construction industry. They take many forms. At the consumer level, it is not uncommon for contractors to place construction liens on customer homes prior to undertaking a major project, like an addition for example. The construction lien works the same way as a mortgage lien.
Construction liens are also utilized by contractors involved in new construction. They place liens on properties when builders fail to pay them. Oftentimes, a construction lien is the only way to get payment from a builder who happens to be short on cash.
No matter the type of lien, the one thing they all have in common is that they represent a legal claim on someone else’s property. When that claim is exercised, it gives the lien holder the legal right to seize the claimed property and sell it to satisfy an outstanding debt. Truth be told, liens are fairly common in modern society.