Lien meaning in banking: Types and lien removal

Liens are legal claims over assets that forbid sale of the said assets until the loan obligation is paid off. The assurance that liens provide is beneficial for the lenders. Certain liens, such as mortgage payments, don’t have a lot of effect on the debtor. 

Suppose you intend to borrow money from the bank for buying a new house. For the guarantee of repayment of the loan, the bank would ask for some property as collateral property. The bank then registers this collateral property with the government agency. This collateral allows the bank to take possession of the property in case of non-fulfillment of loan obligation. This collateral property is known as a lien. 

In case the debtor is unable to pay the loan, there is very little leverage that the lender has over the debtor. Hence, the lien came into being. A lien is a legal claim or right that allows a person or organisation the right to someone else’s property. If a borrower fails to meet their legal or financial obligation, the lien ensures security for the lender. Lienee is the grantor or the original owner of the property and the lienor is the party that receives the lien. Existing debts of lien are a part of the public record to inform potential creditors and others. 

How does a lien work?

A lien gives the right of the property to the lienholder. It allows the holder to force the sale of the property to satisfy their debts. As properties are an illiquid type of asset, this is the only way in which the financial payment can be received.

If a property has multiple liens on it, the proceeds from the sale of the property are paid according to when each lienor recorded their lien. The oldest/ first lien holder is paid first, and the others follow accordingly. In some circumstances, some lien types, like the property tax liens, may take priority and not follow the above priority rule.

Types of lien

There are five types of lien. These include:

• Bank lien

Bank lien is often granted in cases when an individual receives a loan from a bank to buy an asset. For example, suppose you take a loan from a bank to purchase a car. You’ll pay for the car with the amount you loan. This will give the bank the legal right to grant a lien of your car. In such cases, if you are unable to repay the loan as well as the interest like promised, the bank is legally justified in taking possession of your car. However, if you are successful in paying off the loan and interest on time, the bank will be required to release the lien, making you the car’s rightful owner. 

• Judgement lien

A judgement lien refers to the lien placed on an asset by the court, usually due to a lawsuit. It helps the creditor in getting the loan amount back in the case of nonpayment by liquidating this asset. 

• Mechanic’s lien

A mechanic’s lien is placed on an asset when an owner is unable to pay a contractor for any services rendered. If the asset’s owner fails to make the required payment, the contractor can take legal action against the owner to get the asset auctioned off to receive the payment. 

• Real estate lien

A real estate lien refers to the legal right to sell or seize a property in case of nonfulfilment of a contract. For instance, if you take a loan from a bank to purchase a property, a lien will be placed on the property until you repay the loan. In case of failure to pay the money back, the bank will be legally justified in sealing your property. 

• Tax lien

Law often permits tax authorities to place liens on assets of taxpayers who fail to pay their taxes on time. 

Liens can be split into two categories. These are the consensual and non-consensual liens.

Consensual liens– Agreement or consent to liens when you purchase something through financing is called consensual liens. These are created by contractual obligations between the concerned parties. Car loans with the car as collateral, real estate loans and mortgages can be examples of this type of liens.

Non-consensual liens – Non-consensual liens arise out of the operation of law and not based on agreement. When a claim is put on an asset for unpaid debt through a court order, it is a non-consensual lien. Tax liens are the most common example of non-consensual liens. It is imposed by a federal, state or local government against a taxpayer’s property. Mechanic’s liens, attorney’s liens and judgement liens are a few other examples of non-consensual liens. 

How to get rid of a lien?

Lien can be removed in two ways by either contesting the lien in court or by proving that it is not valid. The person or organisation who created the lien is generally the one who can remove it. However, there are other exceptions too. 

The lien can be resolved through these methods-

• Paying off the debt that is owed to the lienholder.
• Settlement or negotiation of the loan amount. The creditor might also want to put the loan behind them and could negotiate for receiving a certain amount at present.
• In case of an illegitimate or invalid lien, contact the lienholder to resolve it. This is possible in the case of second-hand items. Sometimes letting the lienholder know might be all that is needed to solve the matter.
• Legal action can be taken in case of disagreements. This is a difficult process where the lien release will be decided by the court or such authority. 
• Some liens expire after several years therefore investigating a lien’s validity could be another way of resolving a lien.

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