Lien vs. Encumbrance: An Overview
A lien represents a monetary claim levied against property to secure payment—the settlement of an obligation from the property owner. An 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.
- A lien is a monetary claim against property intended to ensure payment.
- Any lien is an encumbrance, but the reverse is not always true.
- Encumbrance refers to any claim against a property, not just one to ensure payment.
A lien is a legal right granted by the owner of a property, by a law, or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.
Liens always represent a financial interest. 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.
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.
An encumbrance is a claim against a property by a party that is not the owner. An encumbrance can affect the transferability of the property and restrict its free use.
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. Easement is a real estate concept that defines a scenario in which one party uses the property of another party, where a fee is paid to the owner of the property in return for the right of easement. Easements are often purchased by public utility companies for the right to erect telephone poles or run pipes either above or beneath private property. However, while fees are paid to the property owner, easements can negatively affect property values in that unsightly power lines, for example, can lower the visual appeal of a piece of land.
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 an unclear title and can limit the ability to sell or otherwise transfer the property.
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.