Lien – Definition

Cite this article as:"Lien – Definition," in The Business Professor, updated January 24, 2020, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/lien-definition/.

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Lien – Definition

A lien is a creditor’s legal claim of right in property held by a debtor. The lien serves to attach collateral (property) to a debt. In the event the debt is not paid, the lien allows the debtor to collect against the property (such as repossessing and selling it) to pay the debt.

A Little More on What is a Lien

Establishing a lien on property is the primary method by which individuals lending money or extending credit to a debtor secures the repayment of the debt. For example, I borrow money to purchase a vehicle. The lender records a lien on the vehicle’s title to demonstrate a claim of right in the automobile. If I fail to repay the loan in accordance with the loan terms, the lender has the legal right to repossess the vehicle.

There are numerous types of lien. These liens differ based upon the method or reason by which the lien arose.

  • Mortgage – A mortgage is a form of lien established in real property. In reality, it is a form of loan that is secured by the real property. The properly recorded mortgage serves a lien against the property. In the event that I fail to pay the loan in accordance with its terms, the creditor can foreclose upon the property.
  • Mechanic’s Lien (or Workman’s Lien) – This is a lien placed on property that is in the care of a service provider to that property. For example, I drop off my vehicle for repair. The mechanic repairs my vehicle. The mechanic has a lien on my vehicle until I pay for the repairs. If I fail to pay, the mechanic can exercise appropriate legal procedures for selling the vehicle to satisfy the debt.
  • Materialman’s Lien – This is a form of lien placed upon real property by someone who provides serves or material improvements to the property. These are common in the construction industry. For example, I contract with a general contractor to build a house. If I fail to pay for work completed by the contractor, he will record a materialman’s lien on my property. This clouds title to the property if I try to sell it and could lead to foreclosure. The same is true if my general contractor fails to pay his subcontractors for work performed on the property. For this reason, many general contractors are required to secure a performance bond to cover this contingency.
  • Tax Lien – A tax lien is a lien placed on the property of a delinquent taxpayer. Most often, these loans result from a failure to pay local real property taxes. They may also result from a failure to pay property taxes on personal property (such as equipment) or income taxes. The lien grants the government the right to foreclose upon and sell the subject property. More often, however, tax liens are often sold to third parties who have the ability to collect the lien by foreclosing upon the property.

References for “Lien”

https://en.wikipedia.org/wiki/Lien

https://www.thebalance.com › Personal Finance › Banking and Loans › Getting a Loan

https://www.investopedia.com › Investing › Real Estate

www.businessdictionary.com/definition/lien.html

https://www.accountingcoach.com/blog/what-is-a-lien

 

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