What is a lien?

Updated March 10, 2022

A lien is a right or claim by a creditor placed against an asset to use as collateral in order to pay a debt. A lien can also be used as a loan repayment guarantee. If the loan is not paid, then the creditor has legal right to take possession of the asset. Liens can help borrowers purchase assets with the financial backing of a home or auto loan. Liens provide a source of security to creditors to ensure their debt will be repaid.

Liens can be voluntary or involuntary.

  • A voluntary lien is when a borrower chooses to use their personal property as collateral in order to get a loan. The lien is then recorded and that record is made available to the public. This enables creditors the ability to verify if potential borrowers have any outstanding liens on their assets before approving a loan. 
  • Involuntary liens, also known as statutory liens, are enacted by creditors who did not receive due payment and are therefore taking legal action to place a lien on the borrower’s asset. In this case, assets can include bank accounts and personal property.

There are multiple types of liens, such as a tax lien, judgment lien and a mechanic lien. Tax liens can be placed on property by tax authorities when individuals have failed to pay taxes. A judgment lien is made by a court based upon a lawsuit. A mechanic lien is placed on property when an owner doesn’t pay a contractor for agreed-upon services. 

Liens can be voluntary or involuntary. Real estate liens are among the most common types. Credit: Stevepb/Pixabay

A real estate lien, which is one of the most common types of liens, can be both voluntary and involuntary. A voluntary lien, such as a mortgage lien or a trust deed, is automatically assigned to a property when a buyer takes out a loan from the bank to purchase a home. The lien is removed from the property once the mortgage is paid off. 

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In an involuntary and nonconsensual real estate lien, the creditor is given legal permission to claim and sell the property when contractual payments are not made by the borrower. In both scenarios, the property used as the asset under the lien cannot be sold by the owner unless granted consent from the lienholder. 

The government can also file liens in order to notify the public that the lienholder has a vested interest in that particular property or asset. All liens are public record and can be accessed by anyone interested in purchasing property. Any and all liens must be released before the asset or property can be sold. 

Just as there are different types of liens there are many different types of lienholders, ranging from small businesses to financial institutions. One of the most common lienholders is a bank. Liens from banks are employed when an individual takes out a loan in order to purchase an asset. If the individual does not repay the loan, the bank seizes the asset. 

Liens can only be removed from property by the creator of the lien. They are most commonly removed when the debt due to the creditor is fully paid off or when both parties agree to negotiated terms. Liens can also be disputed if there is a disagreement between the lienholder and the borrower. Other liens expire on their own after several years.