Lien Agreement Form: Everything You Need to Know
The lien agreement form is a security measure taken by the creditor by which an asset owned by the debtor cannot be sold before the creditor is repaid in full.3 min read
Lien Agreements: How They Work
The most commonly used type of lien agreement occurs when buying an automobile, so we will use that example to properly define and explain how the lien works.
When you decide to buy a car you visit a dealership. When purchasing the car, you also work with a bank that provides you the necessary loan, while a lien agreement is placed by the bank on the vehicle. They will also hold onto the automobile's title. The lien is recorded with the help of a UCC-1 form and then the payments start. From this moment, the situation can go on one of three separate ways:
- You make all your payments on time until the vehicle is paid in full, and at that moment the bank gives you the car's title
- You stop making payments at a specific time. In this situation the bank will use the lien agreement to take the automobile from you, while continuing to own the title, therefore having full possession.
- You still have outstanding payments on the car, but you decide to try and sell it. You can't sell a vehicle without its title, so with the bank holding the title it is impossible to sell until you've paid off all debt to the bank.
Types of Liens
- Consensual liens – A lien that you voluntarily agree to when buying a product or a service.
- Statutory liens – Also known as non-consensual liens, they are issued by a court and their purpose is to enforce overdue payment. There are two types of consensual liens:
- Tax liens – Liens placed by local authorities to recover unpaid taxes owed by people or companies
- Contractor's or mechanic's liens – When performing a service, if the customer fails to fully reward the contractor, the court issues a lien on the property being worked on. As in all liens agreements, if the customer who fails to pay the tries to sell the asset, they're legally unable to do so before paying the contractor in full.
Ending a Lien
When the property that the lien agreement is made for is fully paid for, a written document called the release of lien is signed by both parties, fully releasing the property from any outstanding lien issued by the contractor.
The type of lien that allows the lender not only to seize one specific property in the event of non-payment, but all properties under the borrower's name, is called a blanket lien. It is very advantageous for the person or institution issuing the loan, but it severely limits the options of whoever is benefiting from the loan.
In the interest of all parties, the lien agreements must be as specific as possible, as it's in no one's interest for any disputes to occur after its signing. As the business world revolves around debt and credit, lien agreements are a crucial part of the whole business process.
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