What is a lien?

A lien is a legal way to secure the payment of a debt. It gives the creditor certain rights over the property of the debtor until the debt is paid.

Some liens allow the property owner to retain possession, but restrict their ability to use the property. Called possessory liens, these allow the creditor to have possession of the property until the debt is paid.

Here's what you need to know about various types of liens, how they come into being, their effect on property rights, and how they come to an end.

Lien basics

A lien comes about when a property owner owes a debt, and the use of their property becomes restricted in some way until the debt is paid.

In the context of liens, the property owner debtor is called the lienee, and the creditor called the lienor or lien holder.

Property that is used to secure payment of a debt is called collateral.

Other terms used with certain types of liens will be discussed in connection with the particular type of lien.

Types of liens

Some liens, known as voluntary liens, require the consent of the property holder. The most common voluntary liens are mortgages and liens securing money loaned on motor vehicles. Voluntary liens arise under the terms of the loan agreement.

Other liens, known as involuntary liens, can come about without the owner's consent. These include mechanic's liens, tax liens, and judgment liens. Involuntary liens are generally governed by state law, which can vary from state to state.

Mortgages

A mortgage on a piece of real property is a special type of lien, in which the property owner who borrowed money is called the mortgagor and the party lending money is called the mortgagee.

The mortgage document is filed in the public land records by the lender. It may be difficult, or impossible, for the property owner to sell or refinance the property unless the loan is paid and the mortgage released by the mortgagee.

It may be possible to borrow against the property and take out a second mortgage, but the second lender's rights are inferior to those of the first mortgagee.

Mechanic's liens

A mechanic's lien, sometimes called a materialman's lien, is used by contractors and subcontractors who perform construction work on real property.

A mechanic's lien document is filed in the public land records by the contractor, so that anyone doing a title search can find it. The property owner will find it difficult, or impossible, to sell or refinance the property unless the debt is paid and the lien released by the contractor.

Vehicle liens

Another common type of lien is when a loan is secured by a motor vehicle. This type of lien is noted on the vehicle's title document that is issued by the state's motor vehicle title agency.

In order for the owner to sell the vehicle and transfer title, the loan will need to be paid and the lien removed from the title document.

Tax liens

If delinquent taxes are owed by an individual or business entity, the federal, state, or local taxing authority may place a lien on property owned by the individual or business entity. This may include both real and personal property, including bank accounts.

A tax lien on real property will be filed in the land records, the same as a mortgage or mechanic's lien.

Judgment liens

If a court judgment requiring the payment of money is entered against an individual or business entity, the party who is owed the money is known as a judgment creditor. This may allow the judgment creditor to place a judgment lien, sometimes called a judicial lien, against property of the individual or business until the debt is paid.

Possessory liens

State or federal law may provide for liens related to particular types of business, which allow the creditor to keep actual possession of the property until the debt is paid. Examples include:

• Mover's or carrier's liens, in favor of someone who transports the goods of another.
• Storage or warehouser's liens, in favor of someone who stores the goods of another.
• Landlord's liens, whereby a landlord can hold and sell property of a delinquent tenant.

Releasing or enforcing a lien

Once the debt is paid, the lienor has an obligation to release the lien. For a lien on real property, this means filing a document, called a release of mortgage or release of lien, in the public land records.

For a motor vehicle lien, it means removing the lien from the title document. For possessory liens, it means returning possession of the property to the owner.

With any type of lien, if the debt is not paid, the lienor may eventually file a court proceeding to foreclose on the lien. This will result in a court order allowing the lienor to take possession of the property and sell it. The sale proceeds are used by the lienor to obtain payment of the debt, plus interests, court costs, and other expenses of collection.

Whether you are a borrower or a lender, a lien can be useful in facilitating the transaction.