Lien

A lien refers to a legal right or claim of a lender over a property that acts as collateral. It imposes restrictions on the sale of the Banking and Financial Institutions (BFSI) collateral until the loan is fully paid off and serves as a security to the creditor in case they cannot recover the loan.

The lien holder is the creditor with legal rights over an asset. The asset can be a fixed property, bank deposit, or inventory. A lien release is required to sell the property without future claims or legal repercussions. This is why home buyers demand a grant or warranty deed.

• Lien refers to a lender's legal claim over an asset they consider collateral or security, based on which they provide the loan.
• Its basic purpose is to impose constraints on the sale or withdrawal of the collateral. This would ensure that the lender can recover the loan if the borrower loses their capacity to pay back.
• A creditor can claim the property at the time of lending. Of course, they can also do so later, but it would require legal interference.

Lien on a property is a legal requirement for many lenders. It is a means to ensure debt recovery. If the borrower doesn't make any interest payments or seeks to extend the loan period indefinitely, the creditor can seize the collateral or asset and recover the loan amount.

Many creditors agree to lend only after the claim is placed legally. But there are situations where the creditors grow uncertain about loan repayment throughout the lending period, probably due to irregular interest payments by the borrower.

The creditor can approach the court and file a claim in such circumstances. Proper paperwork will be an advantage to creditors and reduce the hassles in the legal process. Once convinced, the court will help place the creditor's claim on the property. This is called a judgment lien.

The IRS places a tax lien on individuals, not in a position to pay taxes. A bank lien is placed by a person's bank on their assets or deposits when they take loans. A real estate lien is imposed on a person's fixed property – house, land, etc.

Further, such claims can be consensual or statutory. Consensual liens arise due to contractual obligations between the creditor and the debtor—for example, bank claims on a mortgage. On the contrary, a statutory claim is placed legally and is mandatory. A tax lien is an appropriate example.

Let's look at a recent case published by Bloomberg. It's an example of how numerous Black families lost their land to tax liens in the mid-twentieth century. The story is set in South Carolina's St. Helena Island, which was home to large populations of Black Americans right from the early twentieth century.

In the 1960s, many Black families living on the island lost their lands, and most didn't know how. Some were told that the property taxes they paid on their land annually were, in fact, the rent amount. But they found it unacceptable, as the land was passed down through generations. Furthermore, they believed the land could never have been owned, as the Black families were the first settlers.

But what really happened was a tax collection mechanism called the 'tax lien sale'. A third person, mostly a White man, paid the Black families' taxes and other fees and thus gained ownership of their land (claim on the property). In such an arrangement, the family would be provided the opportunity to pay back the person within a year. If they didn't do so, the land would become the third person's property.

The problem was that none of the Black families knew of such an arrangement – when the person took a claim on their property, had to pay back the person, or lost the property. However, all this was legal back then and is so, even today.

• A lien is a claim on another individual's asset. It is an arrangement made to secure a loan. Its subject is the collateral. A lien on the property ensures that the collateral remains secure in the lender's best interest.
• Collateral can be any fixed asset or an immovable property like a house, car, land, etc. It can also be a current asset like stock or bank deposit. The sale or withdrawal of these assets will be restricted until the creditor fully recovers the loan amount.
• A mortgage is a different concept. It is a legal arrangement where the lender loans the amount to the buyer to finance their home purchase. The borrower makes regular interest payments until the claim on the property is released. Since the house is the collateral in a mortgage, the creditor's claim on the house exists.
• On the other hand, an encumbrance is also a claim on a property. However, as opposed to a lien (which acts as security), an encumbrance does not imply any monetary or financial interests. Also, it is directly aimed at the property.

This article has been a guide to Lien and its meaning. We explain the topic in detail with its example, and a comparison with collateral, mortgage & encumbrance. You may also find some useful articles here -

• Judgment Lien
• Lien Waiver
• Tax Lien Certificate