You may have heard the term lien before, but what does it mean exactly? Simply put, a lien means that there is a â€œholdâ€ (a legal claim) on a particular property. This can be real estate property or personal property. This means that the property becomes collateral against the services or money that is owed from one person to another or from a person to an entity (a bank or a financing company for example).
A lien typically exists in situations such as money loaned against any other substantial items owned by the borrowers, loans against vehicle titles, or second mortgages.
A lien will prevent the borrower (the person owing the money) from selling that particular property, or at the very least prevent him or her from transferring the title to that property to someone else before the obligation or debt is fulfilled. In some situations, the person or entity who is owed the money can use legal means to have a lien placed on the property or at least a part of the property (depending on the overall value of the debt).
Examples of liens
Even though the description of a lien is relatively straightforward, it would be good to have a few examples of how liens work.
- Perhaps a company has a tax obligation to the United States government. It is possible for the government to file a lien on the assets of the company until the company fulfills its tax obligation.
- A mortgage is essentially a lien because it is in place to guarantee the long-term real estate loan offered to the lender. The lien means that before the real estate can change hands to another party, the amount owed on the loan has to be paid to the lender.
- A financial institution may offer a retailer $75,000, but with the stipulation that there is a lien on the retailer’s inventory. This means that the loan is secured because the lien means that that the lender has something of value that they can reclaim should the retailer fail to make payments.
In short, this legal document allows the lender to make a claim on the borrowerâ€™s property. This offers some collateral or protection for the creditor until the amount owed to the creditor is paid up.
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