What is a privilege?
A lien is a claim or legal right over assets that are generally used as collateral to honor a debt. A lien can be established by a creditor or a court order. A lien is used to secure an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the obligee may be able to seize the asset which is the subject of the lien. There are many types of privileges that are used to secure assets.
Key points to remember
- A lien is a claim or legal right over assets that are generally used as collateral to honor a debt.
- If the underlying obligation is not fulfilled, the obligee may be able to seize the asset which is the subject of the lien.
- Various types of privileges can be established, in particular by a creditor, a court decision or a tax authority.
How privileges work
A lien gives a creditor the legal right to seize and sell the property or collateral asset of a borrower who does not meet the obligations of a loan or contract. The property which is the subject of a lien cannot be sold by the owner without the consent of the holder of the lien. A floating lien refers to a lien on inventory or other unsecured property.
Lien can be voluntary or consensual, such as a lien on a property for a loan. However, there are also involuntary or statutory liens whereby a creditor takes legal action for non-payment and as a result a lien is placed on assets including property and bank accounts.
Certain liens are filed with the government to inform the public that the lien holder has an interest in the asset or property. The public record of a lien indicates to anyone interested in purchasing the asset or collateral that the lien must be released before the asset can be sold.
Types of privileges
There are many types of privileges and privilege holders. Privileges can be set up by financial institutions, governments and small businesses. Below are some of the most common privileges.
A lien is often granted when an individual takes out a loan from a bank to purchase property. For example, if an individual buys a vehicle, the seller will be paid with the funds borrowed from the bank. In turn, the bank would be granted a lien on the vehicle. If the borrower does not repay the loan, the bank can enforce the lien, seize the vehicle, and sell it to pay off the loan. If the borrower repays the loan in full, the lien holder (the bank) then releases the lien and the individual owns the car free and leaves any lien.
A judgment lien is a lien placed on assets by the courts, which usually results from legal action. A court lien could help a defendant get reimbursed for non-payment by liquidating the defendant’s assets.
A mechanic’s lien can be attached to real estate if the owner does not pay a contractor for the services rendered. If the debtor never pays, the entrepreneur could go to court and get a judgment against the non-paying party, whereby property or assets can be auctioned off to pay the lien holder. Many service providers have the option of placing a lien to secure payment, including construction companies and dry cleaners.
Real estate privilege
A lien on real estate is a legal right to seize and sell real estate if a contract is not fulfilled. Some real estate liens are automatically put in place, such as a mortgage lien. When a party borrows money from a bank to buy their house, the bank places a lien on the house until the mortgage is paid off. However, some real estate liens are due to non-payment to a creditor or a financial institution and, therefore, are involuntary and non-consensual liens.
There are also several statutory privileges, that is, privileges created by law, as opposed to those created by contract. These privileges are very common in the field of taxation, where laws often allow tax authorities to put liens on the property of defaulting taxpayers. For example, municipalities can use liens to recover unpaid property taxes.
In the United States, if a taxpayer becomes delinquent and shows no indication of payment of taxes owed, the Internal Revenue Service (IRS) can take legal action against a taxpayer’s property, including his home, his vehicle and bank accounts. A federal tax lien notice notifies creditors of the government claim and may lead to a sale by the sheriff.A sheriff’s sale is a public auction in which assets are repossessed, sold, and the funds generated are used to pay off debt to a creditor, a bank, or the IRS.
A tax lien also affects the taxpayer’s ability to sell existing assets and obtain credit. The only way to release a federal tax lien is to pay the tax owed in full or to reach a settlement with the IRS. The IRS has the power to seize the assets of a taxpayer who ignores a tax lien. Typically, the IRS uses overdue tax liens as a last resort after all other options have been exhausted, such as collection, installment plans, and settlement.