In the simplest terms, a lien is a claim someone can make on another person’s property when that person owes the claimant a sum of money. Liens commonly occur when a creditor places one on a house after the debtor fails to fulfill a financial obligation on a loan. A lien places restrictions on what the owner may do with the property until the debt he or she owes is satisfied. In many cases, the debtor may continue to use the property while it is under the control of a creditor, but this isn’t always the case.
The Basics of How Liens Work
One of the most common types of liens is one placed on a vehicle when someone purchases a car and uses a loan to do so. While the loan is in repayment, the bank places a lien on the vehicle and holds back the title on the vehicle until the loan is paid off. When the debtor pays the loan in full, the bank simply releases the title to the debtor, and the relationship between the two parties is complete.
If the debtor stops making payments, the bank may repossess the vehicle using the lien and keep the title until the bank sells the vehicle to another party to recoup the cost of the loan or makes arrangements with the debtor to restart payments on the loan. While the vehicle lien is one of the most common types, they are used in other circumstances like in construction and mortgages.
Consensual and Non-Consensual Liens
The lien that exists from a traditional car loan is consensual, and the debtor agrees to the arrangement with the bank holding the title to the vehicle until the loan is paid off. Other types include non-consensual liens obtained because of a tax debt, an unpaid bill to a contractor or mechanic, or a court judgment.
The purpose of a non-consensual lien is to ensure a creditor can protect his or her investment and prevent the debtor from profiting off of the sale of the property or getting out of having to pay the debt. To sell the property or use it, the debtor must pay the debt to the person, company, or organization that brought the lien.
Possible Outcomes of a Lien
The existence of a lien doesn’t automatically mean a debtor will lose his or her property. In the case of a consensual lien created during the purchase of a vehicle and a bank loan, the arrangement will conclude without any judgment, fees, or problems as long as the debtor fulfills his or her responsibility in paying the loan.
In cases where a lien occurs due to a judgment in court or because of a federal tax lien from the Internal Revenue Service, the existence of it may prevent a homeowner from selling or refinancing the home. Problems with property taxes, building contractors, or vehicle lenders may also create problems for the owner of the property who can’t use or sell it because he or she doesn’t control the title.
Financial issues impact almost everyone at one time or another, and facing the threat of a lien may mean securing the help of a lawyer when there is the threat of a trial. However, a debtor may also have the opportunity to resolve a potential lien issue before the creditor makes an official move on the matter.
