What is a Voluntary Lien?
A voluntary lien is a lien where the owner of a property consensually grants another party legal claim to the property as security for the repayment of a debt. The debtor voluntarily grants the lien to the lender, and the property acts as collateral. If a debtor defaulted on making payments, the property with the lien attached would be seized.
The counterpart to a voluntary lien is an involuntary lien. As the name would imply, they are liens that are involuntarily placed on a property through the law. For example, a court or another regulatory authority can place a lien on a piece of real estate if taxes are not paid.
- A voluntary lien is a type of lien where an owner of a property grants a legal claim to the property to another party. If a borrower defaults on payments, the holder of the lien can seize the property from the owner.
- The outside party, usually a lender, is granted a claim to the property as collateral for a debt or service rendered.
- Examples of voluntary liens are liens placed on homes and cars that are financed.
How Liens Work
Liens are often placed on a property that is financed. The most common examples are liens placed on real estate and vehicles. When you finance a house or a car, you agree to have a lien placed on the property. It protects the lenders from losing money if the debtor happens to default.
If a debtor does not make their payments on a house they financed, the property will be foreclosed and seized by the lender. If a debtor who purchased a new sedan isn’t making payments, the car will be repossessed. In either case, the lender, who holds the lien, can retrieve the asset to recoup value lost through defaulted payments.
Voluntary liens are often mandatory for a borrower trying to secure financing. Without it, the lender risks too much, and the risk of default with no collateral is not one most are willing to take.
Involuntary liens are liens that are placed on a property by an outside authority against the will of the owner. Rather than mortgage lenders placing a lien on the property, involuntary liens are typically placed on properties from regulatory authorities for unpaid debt obligations.
A common example of an involuntary lien is a tax lien. A tax lien is issued by the government when taxes are owed. If you avoid paying income taxes or property taxes on your home, the Internal Revenue Service (IRS) will file an involuntary lien to alert creditors that they have a right to your property.
The lien can claim your real estate, other personal property, and financial assets. With a lien against your assets, you will not have a claim to them until the debts are paid. In the example of a tax lien, the government is going to get paid one way or another.
Property Types that Voluntary Liens Claim
The most common examples for voluntary liens are mortgages on a home and liens placed on cars that are financed. Voluntary liens can be placed on any type of property with value. The point of the voluntary lien is for a lender to secure collateral for a debt or service rendered.
Property that voluntary liens are placed on include:
- Valuable art
Example of Borrowing against Home Equity
A married couple purchased their home 20 years ago with a mortgage of $200,000. A voluntary lien had a claim on the house until the mortgage was fully paid off. Once the debt was repaid, the lender no longer had a claim to the home, and the couple had full legal ownership.
A few years later, the couple wants to build out an extension and a basement for their garage. The project is likely to cost more than $50,000, which the couple does not have on hand. They decided to borrow against the equity of their home.
To secure a $50,000 loan from a lender, they created another voluntary lien by borrowing against the equity they had in their home. A lender, once again, has a claim against the property for the value of the amount loaned.
The couple now has $50,000 cash to expand their garage, and they will make payments to the lender until the debt is repaid. Once that debt is paid off, the second voluntary lien will be lifted.
A lien is simply a claim to a property or asset. There are voluntary liens, where the owner of a property agrees to grant another party legal claim to their property. The counterpart of a voluntary lien is an involuntary lien, where a party claims an owner’s property or assets against their will. It comes as a result of money being owed.
For either lien, there is a debtor and someone on the other side who is trying to get paid. With a voluntary lien, an owner agrees to the lien because it is often the only way they can secure financing for the property.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: