What is a lien?

A lien is a claim made on a property in order to satisfy a debt. Liens are often applied to real estate, although an entity may place a lien on any property to which a debt or obligation is owed. A lien often results when the owner of the property loses a lawsuit, and it compels the owner to meet its terms or risk losing the property.

Deeper definition

In some cases, such as when a borrower does not pay his mortgage or neglects to pay income or property taxes, a lien may be placed against his property as a way for the lender or the Internal Revenue Service (IRS) to try and recoup what is owed to them. The latter case is called a tax lien. In other instances, a lien may result from the failure to pay fees associated with a received service, child support, contractor’s bills, rent, or a court judgment.

Virtually any transaction for which the consumer of a good or service refuses or is unable to pay may result in a lien. In each case, the lien holder reserves the right to seize property as a security for that payment: the owner of a hotel, for example, may assert a right to property brought into the establishment by a guest who has not paid for her stay; likewise, an attorney seeking fees for his service may hold on to documents associated with the case, including titles or business material.

There are many situations that may call for a lien. If a spouse falls behind on alimony payments, the recipient may ask that a lien be placed on the spouse’s real estate holdings, even if the terms of alimony do not refer to real estate. A contractor who has not been paid obviously can’t walk away with the fixtures she installed, but she can sue the person who hired her and potentially take that person’s home.

In what’s called a consensual lien, a borrower may actually seek out a lien by offering property as collateral for a loan. Every mortgage agreement is a form of consensual lien; the bank has final legal ownership of a property until the loan is repaid in full. These liens are common and are only problematic if the homeowner fails to meet the repayment terms spelled out in the agreement.

In some states, those are called voluntary liens. With Bankrate’s mortgage calculators, you can decide if one is right for you.

Lien example

Bill agreed to pay a princely sum to rent Ted’s time machine for a quick jaunt through history. When he returned to the present, Ted presented him with a bill for the cost of the rental. After Bill, like, totally declined to pay, Ted took him to court and won a lawsuit for the unpaid fee. The court placed a lien on Bill’s excellent house, allowing Ted to seize the property if his rental fee is not paid within a reasonable time. Bill sends Ted a check that weekend, and the lien is dropped.

Other Personal FinanceTerms

More From Bankrate