If you have a lien on your business’ property or assets, you’re likely concerned about the legal ramifications of failing to pay a debt. In this article we will explain the different types of liens that may affect your business.
What is a lien?
A lien is a legal claim against either a business’ property or assets. This allows a lender, or lien holder, to either take control of or take legal action to settle any debts on the property or assets. This gives a credit security interest in your business property until that lien is released.
For example, if you purchase a vehicle for your business and pay for it with a loan from the bank, the bank places a lien on that car and holds the title. If you fail to make payments on that loan according to your schedule, that bank can sell the vehicle and recover the amount because the security interest that they hold gives them ownership of the asset.
When you make payments towards the loan and eventually pay off the debt the lien will be removed. Once that lien is released you are the rightful owner of the asset and you may keep it or even sell it. But, if you fail to pay your debt the lien holder has title to the property or assets, so they can sell it to someone else.
What are the different types of liens?
There are three different types of liens small business owners need to be aware of: Consensual, Statutory, and Judgement.
Consensual Liens
Consensual liens are voluntary. They are often the result of a loan or an advancement on a line of credit. As a condition of obtaining the loan or line of credit, the borrower has pledged the asset as security to the creditor. Examples of a consensual lien would be a residential mortgage, deed of trust, vehicle loan, or the financing of furniture or equipment.
When borrowing money, a consensual lien is often created as a security measure for the lender. In the event of default, it protects the creditor, who then takes the asset to recoup their costs.
What are the two types of consensual liens?
Purchase-Money Security Interest Liens provide the purchaser with the needed funds to purchase the property that is causing the debt. This is the category that first home mortgages, car loans, and the financing of furniture or equipment fall under.
Non-Purchase-Money Security Interest Liens is where the debtor uses assets, already owned property, as collateral for a loan. In this category, you’ll find second mortgages and refinancing of a mortgage.
Typically consensual liens are non-possessory. The one supplying the line of credit does not take possession of the property. The debtor takes or retains possession. In a possessory lien, the lender holds onto the property for the length of the loan or agreement. An example of a possessory lien would be a pawnshop that holds onto the item as collateral until the loan is repaid.
Statutory Liens
Creditors can obtain security interests by the operation of state (or federal) laws. These are not liens in which you enter into voluntarily but ones that creditors use to gain access to your assets in order to satisfy your debts.
What are two types of statutory liens?
A Mechanic’s Lien occurs when work has been performed or supplies have been provided to a business or individual. The service or goods provider places a lien against property to secure payment for the goods or service provided. This type of lien can delay or prevent the sale of the property until the debt is paid. If the owner attempts to sell the property that the contractor worked on, then that contractor has a secured interest in a portion of the proceeds in order to pay the debt owed.
A Tax Lien is placed against the property by the local, state, or federal government, as authorized by statute, for delinquent taxes, including property, income, and estate taxes.
Judgment Liens
A judgment lien occurs as the result of a lawsuit. There are a number of reasons why a court may grant a creditor interest in your property. For example, if someone is injured because of negligence on your part, the injured person may sue you. If the court rules in the other party’s favor, then you incur a judgment debt. If the amount is not paid, then wages can be garnished, bank accounts seized, or a lien placed against your property.
If you are interested in learning more about your rights to your property or assets as a business owner, call our office today.