What is an Unperfected Lien
An unperfected lien is a lien that the lender did not file correctly with the legal authority or one in which the lender did not verify that no prior liens existed on the subject asset. A lien is a legal right granted by the owner of an asset, such as a piece of property, to a lender. A lien serves to guarantee an underlying obligation, such as the repayment of a loan.
If the underlying obligation is not satisfied, the lender may be able to seize the asset that is the subject of the lien. Unperfected liens leave lenders open to the possibility that other creditors have an existing claim on the asset or property, and can challenge the lender for the asset or property. In contrast, a perfected lien is a lien that has been recorded correctly with the legal authority, making it legally binding, and for which the lender has confirmed no prior liens exist.
BREAKING DOWN Unperfected Lien
"Perfected" is a legal term that refers to correctly completing all required steps in filing a legal document. Unperfected liens can remain unperfected for many reasons. Lenders that neglect to record their statement of financing for the subject piece of property have failed to perfect their lien. Failure of a lender to discover a previously filed lien also renders their lien unperfected. A creditor with a perfected lien has priority, as far as being paid for their debt first, over a creditor with an unperfected lien. However, in a dispute or bankruptcy, a court normally treats unperfected liens as valid if there are no disputes from other parties.