What is ‘Lien’
A lien is a legal right granted by the owner of property, by a law or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.
BREAKING DOWN ‘Lien’
Once executed, a lien becomes the legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan or other contract. The property that is the subject of a lien cannot be sold by the owner without the consent of the lien holder.
Practical Examples of Liens
A lien is often granted when an individual takes out a loan from a bank to purchase an automobile. The individual purchases the vehicle and pays the seller using the funds from the bank, but grants the bank a lien on the vehicle. If the individual does not repay the loan, the bank may execute the lien, seize the vehicle and sell it to repay the loan. If the individual does repay the loan in full, the lien holder (the bank) then releases the lien, and the individual owns the property free and clear of any liens.
Another type of lien is a mechanic’s lien. which can be attached to real property if the property owner fails to pay a contractor for services rendered. If the debtor never pays, the property can be auctioned off to pay the lien holder.
Liens and Taxes
There are also several statutory liens, meaning liens created by laws, as opposed to those created by a contract. These are very common in the field of taxation, where laws often allow tax authorities to put liens on the property of delinquent taxpayers. For example, municipalities can use liens to recover unpaid property taxes.
In the United States, if a taxpayer becomes delinquent and shows no indication of paying owed taxes, the IRS may place a legal claim against a taxpayer’s property, including his home, vehicle and bank accounts. A federal tax lien has precedence over all other creditors’ claims. It also affects the taxpayer’s ability to sell existing assets and to obtain credit. The only way to release a federal tax lien is to fully pay the tax owed or to reach a settlement with the IRS. The IRS can seize the assets of a taxpayer who ignores a tax lien.