A lien is a legal right to keep possession of property, assets, or other collateral if a debt has not been satisfied.
Loans or financing terms have contractual obligations that if not met, a lender may legally seize or sell your collateral. Depending on what or whom has been failed to pay, different types of liens may be placed on your assets. Fortunately, it may be eliminated if the debt is paid in full. Furthermore, if a court approves an appeal to remove the lien, or if business files for bankruptcy.
Types of Liens
The two basic categories of liens are voluntary and involuntary.
A voluntary lien is a lien that a business is aware of and has agreed to. On the contrary, an involuntary lien is one that was not agreed upon and may be filed without consent. The involuntary lien may only be placed by a court. Typically due to specific laws regarding non-payment of a loan, or other types of financing. Aside from these categories, there are several other types of liens depending on the asset or loan, however not typically utilized.
A tax lien is placed on assets when taxes are not paid. A federal tax lien is a government’s legal claim against one’s property or other assets. This type of lien can be removed once the tax debt is paid in full. It is typically released within 30 days after it has been paid. If one cannot pay the debt in full, the IRS (Internal Revenue Service) or government entity/department will typically offer some form of payment option to assist payment of the balance(s) due.
Bank and Real Estate Liens
A bank lien is granted when one seeks a loan from a bank, whether it is for property, a vehicle, or other type of assets(s). If the loan is not repaid, the bank will have the right to execute the lien, take away the listed asset(s), and sell it to repay the debt. A real estate or property lien is automatically put in place by a bank when you purchase a home/residence. The bank will have the legal right to seize and sell the property until the mortgage/loan is paid off in full.
A mechanic lien is a commitment to pay builders, contractors, and construction firms for services they have provided. Many service providers place a lien to secure payment. However, if a debtor fails to pay, the contractor may go to court to get a judgment against the debtor. If the judgement favors the service provider, they may auction off and sell the debtor’s assets. Each state has its own laws regarding mechanic liens and costs.
The court places judgement liens on assets as a result of a lawsuit, similar to mechanic liens. A court ruling would give a creditor the right to take the debtor’s assets if they have failed to fulfil their obligations.This is considered nonconsensual/involuntary because it attaches to an asset without the owner’s consent. To avoid this, debt must be paid in full or the debtor may argue lien avoidance if it derived from a court-issued money judgement, if the debtor is entitled to claim an exception on their equity, or if it would result in loss of equity.
Liens for Business Owners
For a business seeking financial assistance, liens may be preferred since they drive down interest rates for borrowers. When a business provides collateral, it offers less risk for lenders. Making it more affordable for a business to borrow money. If you own a business and provide services for customers who may not pay, you may have to place one yourself. Businesses can ensure they get paid by utilizing liens, which are a powerful tool.