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Understanding Liens


If you financed the purchase of a car or used a bank loan to purchase your home you also agreed to accept a lien.

Simply put, you approved of the lender’s right to take possession of the property if the stipulations of the loan agreement are not met. In other words, if you fail to make your car payment or mortgage payment, the bank will exercise its lien and repossess the car or foreclose on the mortgage.

With his in mind, it’s easy to see why understanding liens is an important aspect of doing business on credit.

How They Function

Let’s go back to the car loan scenario for a moment.

When you borrow money to buy a car, you’ll either make all of the payments and satisfy the loan agreement; sell the car before the loan term ends or you could run into trouble and find yourself unable to pay off the loan.

The bank will release the lien as soon as you come up with the cash to pay off the loan in either of the first two instances. If you keep the car, the lender will remove the lien and sign title of the car over to you.

Should you sell the car, the amount of the sale price required to pay off the loan will go to the lender—at which point they’ll remove the lien and sign title over to whomever you designate. If the new buyer took out a loan too, title will go to the entity providing the funds.

If the car sells for more than you owe, the balance will go to you.

In the third case—you default on the loan—the lender will take the car back and sell it to recoup their losses.

The Different Types

The liens discussed above are known as consensual. In other words you agree to accept it as a condition of getting whatever it is you want. This is the most common type, as people consent to them when they receive a secured loan to make a purchase.

However, liens can also be applied to property without your consent. This typically happens by court decree, and most often takes the form of tax liens, contractor’s liens or mechanic’s liens. In these instances, a claim is laid to property by an entity owed by the property owner for malfeasances such as delinquent taxes, unpaid work or missed child support payments.

Liens Can Be Problematic

Let’s say a contractor does work on a home. The property owner promises to pay off the work over time, but fails to pay the entire amount owed. The contractor can file a claim in court against the owner of the property and win a judgment that states the contractor must be paid in full before title can transfer to a new owner.

Should you find yourself in a situation in which you cannot afford to pay off work of this nature, this could mean there are other unsettled debts as well. Companies such as Freedom Debt Relief could help you settle most of your other debts to make clearing a lien easier to do.

Getting Them Cleared

Once the debt is satisfied, the holder of the lien will provide a “Release of Lien” document confirming the debt has been paid and the property owner is free to transfer title to another owner. This document also states there will be no subsequent actions by that particular debtor.

As you can see, liens can create issues by restricting your capabilities. However, understanding liens and making every effort to meet your obligations, will help prevent them from being a problem for you.

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