Voluntary Lien

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What Is A Voluntary Lien?

A voluntary lien in real estate refers to the lender's right to hold a particular property in possession as a security toward the repayment of the borrower's loan. Here, the borrower will voluntarily agree to enter the contract rather than due to a legal compulsion.

The borrower usually has several restrictions regarding the use and sale of the property, which is done to secure the lender's interests. If the borrower doesn't repay the loan, the lender retains the right to acquire and liquidate the asset to recover their losses legally.

What Is A Voluntary Lien?

A voluntary lien refers to a legally binding agreement between a creditor and a debtor, granting the creditor the right to assume possession of the borrower's property in the event of loan non-repayment.
It is a specific lien, as the right of possession is placed on the property, not the individual's assets.
A mortgage lien is the most common example, as the borrower consents to the arrangement.
Parties to the contract can download a sample voluntary lien form online, sign it, record it, and notify the relevant government authorities.

Voluntary Lien Explained

A voluntary lien in real estate is a consensual agreement between a creditor (lender) and a debtor (borrower). The lender loans some money to the borrower to purchase an asset, usually a real estate property. The value of the lien is based on the asset's value.

This lien is unique because it is entered voluntarily by both parties. A legal contract is born due to mutual agreement and arrangement. The lender's rights and the borrower's obligations are clearly defined, along with other clauses relating to the payment period, terms of repayment, and actions to be undertaken in case of non-repayment or delay in interest payment.

Liens are usually activated when the borrower fails to make payment. The lender warns the borrower, and despite this, if the borrower defaults, the former can confiscate the property through foreclosure. In a foreclosure, the ownership rights will be transferred to the lender through a legal process. The lender can then decide what to do with the property. Most lenders choose to sell the property and recover the loan amount.

Generally, liens are of two types – specific and general. Specific liens apply to a single property that serves as collateral. General liens apply to all the assets owned by an individual. It is a specific lien placed on a particular property for which an individual borrows money from the lender.

While specific voluntary liens are primarily associated with houses, it is also placed on cars, pieces of art, and other physical properties. In addition, some lenders also provide business and personal loans using a particular asset as collateral.

In such cases, the borrower, who is the asset owner, cannot sell the property. An example of this type of lien is a mortgage lien. If they want to sell, they must provide another collateral and seek approval from the lender. It is important to remember that liens are attached to the property and not the people.

Examples

Study the examples given below to understand the concept better.

Example #1

Consider the hypothetical example of a lender ABC Bank and a mortgagor David. David borrows $400,000 to purchase a house. He makes interest payments for a year and then starts defaulting on his payments. Six months later, ABC Bank confiscates David's house and sells it to another party as they have a lien on the property.

Example #2

Brookfield Corps, a prominent global real estate company, experienced defaults on office building mortgages totaling $161.4 million in the Washington, D.C., area. In addition, the company defaulted on a loan of $784 million in mortgages in Los Angeles. The real estate debt crisis, high office vacancy, and rising interest rates seemed to be the possible causes.

Pacific Management Investment Company is another firm that defaulted on office mortgages worth $1.7 billion. Further, the Wall Street Journal reported a risk of five to ten office mortgage defaults per month in the United States. Despite a voluntary lien, this poses a threat to small regional banks that have lent to these companies.

Voluntary vs Involuntary Lien

A voluntary and an involuntary lien are often contrasted with each other. However, understanding the differences between these two types is crucial in navigating the complexities of property rights and financial obligations.

Basis	Voluntary lien	Involuntary lien
Consent	The right is placed when the borrower consents. The borrower willingly agrees to grant the lender a legal claim on the property as security for the loan or credit.	It is a right to possess a property placed against the owner's consent. It is not voluntary and is placed due to legal compulsion.
Establishment	It is initiated by the borrower seeking a loan or credit and voluntarily agreeing to the terms of the lien.	It is typically initiated by a creditor or governing authority to enforce legal obligations or unpaid debts.
Examples	Examples include Mortgages, trust deeds, secured loans, etc.	Examples encompass Tax liens, mechanic's liens, judgment liens, etc.
Purpose	It provides security for a loan or credit transaction.	It allows the lender to have a legal claim on the property or asset in case the borrower defaults on the loan, ensuring that the lender has recourse to recover their funds.

Frequently Asked Questions (FAQs)

1. Which circumstance would create a voluntary lien?

A voluntary lien can be created in situations such as securing a mortgage for a home, obtaining an auto loan for a vehicle purchase, using business assets as collateral for business financing, or offering personal assets as security for a personal loan. These actions involve willingly granting a legal claim on the property or assets to the lender or creditor.

2. Do voluntary liens need to be recorded?

Yes. Voluntary liens are usually registered with the appropriate government department. It will secure the property and the lender's interests. In addition, it will inform other creditors and property buyers that the property has a lien. Finally, recording the lien helps prevent confusion or disputes in the future.

3. How to file a voluntary lien?

The parties to the contract can fill up the voluntary lien form, review local recording requirements, get the document notarized, notify the relevant government agencies, and obtain evidence. Finally, the parties should attest to the document.