A lien is a claim or legal right against property that is typically used as security for a debt. A lien could be imposed by a creditor or a court order. A lien serves as security for an underlying obligation, such as loan repayment. If the obligation underlying the lien is not satisfied, the creditor may be able to seize the asset subject to the lien. There are numerous lien types used to secure assets.

What Is a Lien, Types of lien and How Lien Works?

• A lien is a claim or legal right against property that is typically used as security for a debt.

• The creditor may have the ability to seize the asset subject to the lien.

• Bank, property, and tax liens are the three types of liens.

•The lender has the legal right to seize and sell a property if a contract on that property is not paid.

• Various types of liens can be imposed, including by creditors, court judgments, and tax authorities.

How Liens Work

A lien gives a creditor the legal right to seize and sell the borrower's collateral property or asset if the borrower defaults on a loan or contract. A lien prevents the owner from selling the subject property without the consent of the lien holder. A floating lien is a lien placed on inventory or other movable property.

Liens can be voluntary or consensual, such as a mortgage lien on a property. However, there are statutory or involuntary liens that allow a creditor to pursue legal action for nonpayment. Consequently, a lien is placed on assets such as real estate and bank accounts.

Some liens are filed with the government to inform the general public of the lienholder's interest in the asset or property. The public record of a lien informs anyone interested in purchasing the asset or collateral that the lien must be released prior to the sale of the asset.

Types of Liens

There are numerous lien types and lien holders. Governments, financial institutions, and small businesses can place liens. Listed below are the most prevalent liens.

Bank Lien

When an individual gets a loan from a bank to purchase an asset or property, a lien is often granted. For instance, if an individual purchases a vehicle, the bank loan would be used to pay the seller. The bank would then receive a lien on the vehicle. If the borrower fails to repay the loan, the bank may execute the lien, seize the vehicle, and sell it in order to cover the debt.

If the borrower repays the loan in full, the lien holder (the bank) releases the lien, and the individual becomes the sole owner of the automobile.

Judgment Lien

Judgment liens are judicial liens placed on property, typically as a result of a lawsuit. In a case of nonpayment, a judgement lien could help a defendant recover payment by seizing the accused's assets.

Mechanic's Lien

If the owner fails to pay a contractor for services rendered, a mechanic's lien may be filed against the property. If the debtor never pays, the contractor could go to court and obtain a judgement against the non-paying party, allowing the lien holder to sell the non-paying party's property or assets. Many service providers, such as construction companies and dry cleaners, can file a lien to secure payment.

Real Estate Lien

A real estate lien is the legal right to seize and sell real property in the event that a contract is not fulfilled. Certain real estate liens, such as a mortgage lien, are placed automatically. When an individual borrows money from a bank to purchase a house, the bank places a lien on the property until the mortgage is repaid.

Nonetheless, some real estate liens are the result of nonpayment to a creditor or financial institution, and are therefore involuntary and nonconsensual.

Tax Liens

There are also several statutory liens, which are created by statute rather than by contract. In the field of taxation, where laws frequently permit tax authorities to place liens on the property of delinquent taxpayers, these liens are extremely common. Municipalities, for instance, can use liens to recover unpaid property taxes.

The Internal Revenue Service (IRS) in the United States may place a legal claim against a taxpayer's property, including the taxpayer's vehicle, home, and bank accounts, if the taxpayer becomes delinquent and shows no indication of paying back taxes. A notice of federal tax lien serves as notice to creditors of the government's claim and can result in a sheriff's sale. The proceeds of a sheriff's sale are used to repay a debt to a creditor, bank, or the Internal Revenue Service.

Additionally, a tax lien impacts the taxpayer's ability to sell existing assets and obtain credit. The only way to remove a federal tax lien is to pay the tax in full or reach a settlement with the Internal Revenue Service. The IRS has the authority to seize the assets of a taxpayer who disregards a tax lien. Generally, the IRS uses tax liens as a last resort, after all other options, such as collection, installment repayment plans, and settlement, have been exhausted.

What Is a Mortgage Lien?

When purchasing a home with a mortgage, the lender has the legal right to seize the property if the mortgage is not paid. Your home serves as collateral for the mortgage loan, and when you borrow money to purchase it, a mortgage lien is placed on it until the loan is repaid.

What Does the Term Lien Mean?

A lien is simply the legal right of a lender to sell your home (a house or a car, for example) if you default on the loan you took out to purchase it.

How Do I Get Rid of a Lien?

By paying off your loan in full, you can eliminate a lien on your home, vehicle, or other asset.