lien

What It Is

A lien is a lender's claim against a collateral asset that may be legally sold should the borrower fail to repay a loan.

How It Works

When someone takes out a sizeable loan, such as a home mortgage or an auto loan, the lender often requires an asset that can be held as collateral against the loan. Thus, the collateral has a lien placed upon it. In the event of non-payment on the part of the borrower, the lending institution can exercise the lien and sell the collateral asset to offset the unpaid loan. Once the loan is repaid in full, the collateral asset is returned to the borrower and the lien dissolved.

To illustrate, suppose someone takes out a $10,000 loan for a new car. As part of the loan's terms, the bank gets to hold the title to the car as a lien against the car until the loan is fully repaid. Should the borrower, at any point, default or refuse to repay the balance of the loan, the bank can use the title to the car to sell it in order to recover the money that was lent.

Why It Matters

A lien protects lenders in the event of non-payment. Since loans with collateral are less risky for the lender, they can lead to lower interest rates for the borrower.

When purchasing a used car, for example, it's important to check for liens against the vehicle. If there is an outstanding debt on the car, the buyer runs the risk of having it repossessed by the lender.

Source: Investing Answers

What It Is

A judgment lien allows a creditor to take possession of a piece of a debtor's property if the debtor does not pay his or her debts.

How It Works

Let's say John Doe owns a pit bull breeding company that borrows $1 million from Bank XYZ. Sales aren't going so well, and John falls behind in the payments to Bank XYZ. Bank XYZ obtains a judgment lien, which allows it to seize his house, car and any other assets necessary to get the $987,465 outstanding balance repaid in full if John does not start making regular payments again. If John does not comply, Bank XYZ simply repossesses and sells the assets.

Judgment liens are also common in cases where a person's insurance doesn't cover the full amount of a judgment resulting from damages in a car accident or other situation.

There are different kinds of judgments. A default judgment, for example, occurs in favor of the plaintiff when the defendant fails to appear in court to defend himself or does not respond to a summons. A deficiency judgment occurs when the sale of a seized piece of property does not generate enough cash to pay the judgment and the court has to place a lien on more property.

Why It Matters

The laws on judgment liens vary by state and by jurisdiction. However, the intent of most judgment liens is to compel the borrower to repay the creditor.

Source: Investing Answers

What It Is

A tax lien is a claim placed on a piece of real estate by a tax authority due to a taxpayer's failure to pay taxes.

How It Works

When a taxpayer fails to pay either income taxes or property taxes, the taxing authority to whom the debt is owed may place a lien against the taxpayers property to ensure that the tax liability will eventually get paid. A property with a tax lien cannot be sold by the owner, which prevents the owner from walking away from the tax liability.

Why It Matters

Tax liens are highly effective for tax enforcement since the property holder can not sell a property that has a lien on it. The taxing authority will keep a lien on the property until the tax liability is paid.

Tax liens can be purchased by investors as an investment. Such investments are considered solid since they are tied to a hard asset.

Source: Investing Answers