What Is a Lien?
A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt. A lien could be established by a creditor or a legal judgment. 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. There are many types of liens that are used to secure assets.
How Liens Work
A lien provides a creditor with the legal right to seize and sell the collateral property or asset of a borrower who fails to meet the obligations of a loan or contract. The property that is the subject of a lien cannot be sold by the owner without the consent of the lien holder. A floating lien refers to a lien on inventory or other unfixed property.
Liens can be voluntary or consensual, such as a lien on a property for a loan. However, there are also involuntary or statutory liens whereby a creditor seeks legal action for nonpayment, and as a result, a lien is placed on assets including property and bank accounts.
Some liens are filed with the government to let the public know that the lienholder has an interest on the asset or property. A lien’s public record tells anyone interested in purchasing the asset or collateral that the lien must be released before the asset can be sold.
Types of Liens
There are many types of liens and lien holders. Liens can be put in place by financial institutions, governments, and small businesses. Below are some of the most common liens.
There are also several statutory liens, meaning liens created by law, as opposed to those created by a contract. These liens 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 does not demonstrate any indication of paying owed taxes, the Internal Revenue Service (IRS) may place a legal claim against a taxpayer's property, including the taxpayer's home, vehicle, and bank accounts. A notice of federal tax lien notifies creditors of the government's claim and can lead to a sheriff's sale.1 A sheriff’s sale is a public auction whereby assets are repossessed, sold, and the generated funds are used to repay a debt to a creditor, bank, or the IRS.
A tax lien 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 has the authority to seize the assets of a taxpayer who ignores a tax lien. Typically, the IRS uses liens for delinquent taxes as a last resort following all other options being exhausted, such as collection, installment repayment plans, and settlement.
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