5.6 Liens

Liens

A lien is a creditor’s claim against personal or real property as security for a debt. If the owner defaults, the creditor can force the sale of the property to satisfy the debt. Liens are encumbrances that restrict free and clear ownership by securing the property as collateral.

• Liens do not usually convey ownership (except in title-theory states with mortgages).
• Liens attach to the property, so new owners acquire the liens as well.
• Properties may have multiple liens; more liens mean less security for creditors.
• Liens terminate when the debt is paid and satisfaction is recorded, or are enforced by foreclosure if default occurs.

Types of Liens:

• Voluntary: Created by the property owner (e.g., mortgage lien).
• Involuntary: Created by legal process (e.g., tax lien, judgment lien).
• General: Applies to all property owned by a debtor (e.g., inheritance tax lien).
• Specific: Applies to a single property (e.g., mortgage lien).
• Superior (senior): Take priority over other liens (e.g., real estate tax, special assessment, inheritance tax liens).
• Junior (inferior): Paid after superior liens (e.g., income tax, judgment, mortgage, mechanic’s liens).

Lien Priority: Superior liens are always paid first, regardless of recording date. Among junior liens, priority is by date of recording, except for mechanic’s liens, which may date from when work began.

Check-In Questions

• What is the main purpose of a lien?
  To give the creditor ownership
  To secure property as collateral for a debt
  To transfer title
  To increase property value
  Show Answer

  Correct Answer: To secure property as collateral for a debt
  Liens allow creditors to claim property if the debt is not paid.
• Which of the following is a superior lien?
  Federal income tax lien
  Real estate tax lien
  Judgment lien
  Mechanic’s lien
  Show Answer

  Correct Answer: Real estate tax lien
  Real estate tax liens are always paid first.