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What is a contractual lien?
There are many kinds of liens (tax liens, mechanic’s liens, judgment liens and statutory liens, for example), and indeed most of them are nonconsensual. But, a contractual lien is a legal claim against property as a result of a voluntary contract, such as a mortgage. The person holding the lien has a legal right to the other person’s property if he or she fails to pay what’s owed.
Many liens are placed on property by creditors because the property owner owes them money. It’s a common debt collection method.
A contractual lien is one that both parties have agreed to, rather than one sought by a creditor when that debtor owes the creditor money. In this instance, the person already has fallen behind on his or her payments.
A contractual lien is built into the contract, such as a mortgage or auto loan. It’s only legal and binding if both parties have agreed to it, and if the court can enforce it and make changes to it.
To be sure, landlords sometimes use contractual liens to help cover any rent owed by a tenant who hasn’t paid. For example if a tenant vacates without paying the full rent owed, the landlord may seize the tenant’s left-behind property and sell it to cover the cost of the past-due rent.
However, the landlord must give notice to the tenant of the sale and must allow the tenant to reclaim the property in exchange for the owed rent. If the landlord sells the property, he or she must provide the tenant with any money left over from the proceeds after covering the rent.
Contractual lien example
Carol is buying a car and the dealer has included a contractual lien as part of the vehicle financing agreement. If she fails to make her monthly car payments, the dealer can act on the lien by seizing the vehicle to recoup its money.
A lien could put you at risk of foreclosure. Find out how to avoid having the bank take back your home if you’re behind on your mortgage payments.