encumbrance

play
noun en·cum·brance \ in-ˈkəm-brən(t)s \
Updated on: 26 Jul 2017

Definition of encumbrance

1 :something that encumbers :impediment, burden
2 :a claim (such as a mortgage) against property

Examples of encumbrance in a Sentence

  1. without the encumbrance of a heavy backpack, I could sprint along the trail

Recent Examples of encumbrance from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'encumbrance.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of encumbrance

1535


Financial Definition of ENCUMBRANCE

encumbrance

What It Is

An encumbrance is a limitation on the ownership of a property.

How It Works

In the real estate world, an encumbrance is similar to a lien. The bond world also includes encumbrances. For instance, let's consider a $100 million bond issue by Company XYZ. Let's say that Company XYZ is willing to pledge $100 million of its assets to the bondholders (that is, let the bondholders place liens on specific assets that they may seize in the event of default), giving them a little extra assurance that they will be paid on time. In that case, the bonds would be considered securitized or asset-backed because the assets have $100 million of encumbrances on them.

Why It Matters

Encumbrances provide security to lenders and bond investors in the case of bankruptcy or default. For example, it is important to note that debentures (bonds backed by the full faith and credit of the issuer) do not have encumbrances. That is, they are not secured by specific pieces of property or collateral and they do have a general claim on the assets and earnings of the issuer. Therefore, if the issuer were to liquidate, the holders of the debenture bonds have a claim on any assets not specifically pledged to secure other debt.

Companies that are extremely creditworthy often have no reason to encumber specific assets in order to sell a bond issue because they'll still pay relatively low interest rates. (This is why debentures can sometimes sell for more than bonds with encumbrances from less creditworthy issuers.) Sometimes issuers also want to leave their assets unencumbered in order to make future financings possible.


Law Dictionary

encumbrance

noun en·cum·brance
variants: also incumbrance \in-ˈkəm-brəns\

legal Definition of encumbrance

:a claim (as a lien) against property; specifically :an interest or right (as an easement or a lease) in real property that may diminish the value of the estate but does not prevent the conveyance of the estate
  • that these premises are free from all encumbrances


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