A lien represents a monetary claim levied against property to secure payment – the settlement of an obligation from the property owner, while encumbrance is a much broader term, referring to any sort of claim against a property. Any lien is an encumbrance, but not all encumbrances are liens.
All Liens Are Encumbrances, But …
Liens always represent a financial interest. Encumbrances are not necessarily monetary, but they also include property use restrictions or easements. Encumbrances can be any interest in the property that burdens or reduces the property's value or clear title.
Liens and encumbrances are most commonly associated with real estate, but either one may be applied to personal property as well. If an individual fails to pay a debt, then a creditor or tax agency may attach a lien or an encumbrance to the individual's property. Having such a claim against the property creates unclear title and can limit the ability to sell or otherwise transfer the property. Liens attached by tax agencies are specifically referred to as tax liens. A federal tax lien is notable in that it takes precedence over any other claims by creditors.
How Liens and Encumbrances Work
A lien often results from a lawsuit initiated by a creditor. It effectively gives the creditor the right to seize and sell the property that the creditor has a lien against to satisfy the outstanding debt. A common example: If a person fails to make the payments on an auto loan, it can lead to the financing company repossessing and selling the car to obtain payment. Liens may even include the right to attach funds in the debtor's bank account.
Any existing encumbrance is required to be disclosed by the owner of the property to potential buyers. A buyer will inherit the encumbrance upon purchasing the property. If a seller does not disclose existing encumbrances, he is subject to legal action by the buyer for his failure to do so.