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A lien is a form of legal right to an asset or property that can be used to secure a debt. This is normally taken out when a loan is procured or credit is taken out to purchase high-value property or pay for an asset.

This important property rights process allows lenders to protect their interests and to ensure that any money lent can be reclaimed one way or another. They are also a financial and legal instrument that borrowers should remain mindful of.

This article briefly explains how liens function in practice. It describes the types of liens that might be used on an item of property and outlines how these debt instruments can be removed.

How Liens Work

Liens are normally made on expensive items you purchase and will pay off via installments. However, liens can also be put on any valuable property, which can be used as collateral to secure a loan or pay back a debt.

If the loan holder defaults on the debt, the creditor then has the option to seize the property and sell it to cover all or some of the outstanding balance. Alternatively, if all payments are met and the sum is fully paid off, the owner of the lien can release their claim.

A lien is registered with a UCC-1 Form. This makes the claim in question a matter of public record in case any disputes arise regarding the ownership or right to the property in question.

It is, however, possible to sell the item that the lien is made against. However, in order to do so, the seller must demonstrate that the asset is being sold in order to raise money to pay off the debt. When selling the item the lien must first be released so that no claims exist when it is transferred to the new owner.

Types of Lien

There are many different types of lien that can be placed on property, depending on the type of debt that needs to be paid. These include the following examples:

  • Bank Lien: When a property buyer secures a loan from a bank or other financial institution a bank lien will often be placed on the item being purchased.
  • Mechanic's Lien: This can be attached to real estate property if a contractor is not paid for services rendered on a home or structure.
  • Real Estate Lien: This can be placed on real estate to cover contractual payment obligations that have not been met. This type of lien is also usually taken out against a property when money is borrowed from a bank or mortgage broker to pay for the home or for extensions, modifications, or repairs.
  • Judgment Lien: If a court fines an individual or they are successfully sued, a judgment lien can be placed on the accused party’s assets to compel payment.
  • Tax Liens: If a taxpayer accrues large debts to the state or federal government, the tax authorities can put liens on the property of the debtor.

How to Remove a Lien

Normally, a lien can be removed by clearing the debt. The debtor must pay off the principal sum of the original loan in order to do this.

In the event you wish to sell the item that the lien is against (such as when using a legal document such as a bill of sale, you will first need to have the claim released by the debt holder. In this situation, you will normally have to place a lien on another asset of equal or greater value.

It is also possible to challenge a lien if you feel that it is inaccurate. To do so you must contact the lien holder and ask for it to be reviewed and corrected.

In all situations that a lien is ended a “release of lien” must be sought out. This is a written legal document that allows debt holders to end a claim to the item. It must be signed and dated to provide proof that the asset is free from liens and judgments.

How Do Liens Apply During Bankruptcy?

Bankruptcy cases will often impact existing liens on property. Many liens will be discharged depending on the type of bankruptcy that has been declared.

However, this isn’t the case for absolutely all situations. Some varieties, such as tax liens, may still apply even after the debtor has been declared bankrupt.