Learn about secured debts and how to recover them from creditors.
A “secured debt” is a loan you owe that is backed by property that your creditors could get back in the event of a default. (“Default” refers to noncompliance with the terms of the contract, such as failure to make the required payments.)
Liens are used to produce secured debt. Liens may be willingly or unwillingly taken. Car loans and home mortgages are two instances of secured obligations that you actively take on. Contrarily, real property tax liens are unintentional liens.
A Voluntary Lien: What Is It?
You typically consent voluntarily to granting a creditor a security interest in your possessions. For instance, a lender may need you to sign a mortgage (or, in some states, a deed of trust) before approving a house loan. An agreement that gives a lender a security interest, or lien, on real property is known as a mortgage or deed of trust. If the homeowner falls behind on the monthly payment, the lien enables a foreclosure auction.
In addition, you can give a lender a lien against any personal property you own or have a stake in that isn’t real estate (real property). Vehicles, furnishings, tools, inventories, stock shares, other forms of investment interests, and even cash are considered to be personal property.
A security agreement is typically used to grant a lien against personal property. For instance, a lender can ask you to sign a security agreement giving it a lien on the automobile you’re buying before extending a new car loan. If you don’t make the agreed-upon payments, the lender may reclaim your car thanks to the voluntary lien.
An Involuntary Lien: What Is It?
Involuntary liens are security interests put on your property through a court order, a state or federal statute, or another legal process. There is no agreement in play. Among involuntary liens are:
Liens on real estate or income taxes
judgment liens as well as landlord liens (in some areas).
How an Obligor “Perfects” a Lien
Perfecting a lien is one of the procedures a secured creditor must take to safeguard its ability to collect. The legal word “perfection” describes the procedure necessary to notify other creditors and other interested parties of a lien or security interest. Depending on the type of property and the relevant state law, a certain step is necessary to perfect a lien. For instance:
Most states require that the lender record all mortgages and trust deeds in the county where the property is situated in order to perfect its lien.
Vehicles Usually, a file with the state motor vehicle department and a notation on the certificate of title are sufficient for lenders to perfect liens against automobiles, motorbikes, and trucks.
Personal Tangible Property
Financing statements are filed in order to perfect security interests in the majority of tangible personal property, such as furniture, tools, items, and supplies. For a secured debt, the borrower, lender, and collateral are all listed in a financing statement.
Financing statements, unlike security agreements, do not require signatures to be in force. As long as you have acknowledged signing the security agreement for the collateral it is intended to protect, the creditor may file a financing statement. Financing statements are often submitted to the secretary of state.
For any creditor, perfecting a lien is a crucial step. Sometimes, borrowers give many creditors liens against the same asset, such as your home. Consider a home equity line of credit, which is often subordinate to the mortgage you obtained to purchase your property. In the event that the owner of the first mortgage is unable to perfect their claim, a junior lien, such as a home equity line of credit, may in fact advance in precedence.
The repercussions of a lender failing to perfect a lien might be significantly more severe in bankruptcy. If you file for bankruptcy, the court has the authority to invalidate any unperfected liens. The lender becomes an unsecured creditor when a lien is put aside because it is handled as if it never existed.