What is Lien Sale?

The term lien sale refers to the sale of a claim being placed and held on an asset by the concerned authority to satisfy the outstanding debt or money owed. E.g., the sale authorized by the state agency to clear the outstanding taxes by selling the property. In such a sale, the agency has a lien on property commensurate with the amount of taxes due. State agencies sell the property lien and collect the proceeds to clear the outstanding taxes or amount that stands due.

  • The lien could be purchased by any individual or business entity by shelling out the amount due. The lienholder will not become the owner by buying the lien on the property; instead, he remains liable to pay the amount due on tax during the period he has a lien.However, he could demand the surchargeSurchargeA surcharge is an extra fee or tax added to the customer’s final bill for paying through check, credit, or debit card rather than cash. The additional sum reflects the extra services offered by the merchant, increased product costs, or government regulatory costs. It could be either a fixed amount or a percentage of the purchase amount.
  • read more and interest amount being paid from the owner of the property. Lien sale is conducted through public auctions, and most of the lien sale is on real estate properties, automobiles, and other personal properties.To illustrate lien sale, vendors, contractors, or suppliers can hold a claim or lien on the part of the property they had operated on for the outstanding amount due to services being rendered.

How does the Process of Lien Sale Work?

  • To illustrate the lien sale, let’s assume. X owns a property in the country for which annual property taxes stand at $5,000. X is currently going through financial trouble because he could not shell out the $5,000 to the tax authority even after the number of notices being sent to X.The tax authority initiates a selling lien on the property to collect the amount due for pending taxes. This kind of lien is known as the tax lien certificate. A tax lien certificateTax Lien CertificateAn investor who is interested in a property can obtain a tax lien certificate by investing his funds in clearing the owner’s outstanding property tax. When the investor repays the property owner, he will earn a certain percentage of interest.read more is a document that the tax authority presents as proof to secure a lien on the part of the property for the unpaid or pending taxes.Once the tax authority exercises the tax lienTax LienTax Lien is a lawful claim concerning the assets of a person or a company that has not paid or failed to pay the taxes owed by the government. It serves as a secure payment of any debt like loans, taxes.read more, the owner cannot legally transfer or sell the property until the unpaid taxes are cleared. Suppose the owner remains reluctant to clear his outstanding taxes for long enough. In that case, the tax authority can take possession of the property and sell the same to recover the unpaid taxes by conducting a public auction.If the tax authority conducts a public auction to recover the unpaid taxes and the same is bought by an investor who clears the payable taxes on behalf of the property owner, the winning bidder would receive the tax lien certificate, which makes him the lienholder and not the owner.The price of the lien is equal to the outstanding amount due on unpaid taxes and other charges, including fees and court charges being incurred by an investor or lienholder.

Types of Lien Sale

Following are the types:

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#1 – Construction Liens

In the construction lien, the contractor holds a lien on the part of the property for which payments are pending for the work done by contractors. Subcontractors also hold a lien against the property owners for the unpaid amount by the contractor.

#2 – Tax Lien

In a tax lien, the tax authority takes possession of the property for which property tax is due. If the owner fails to clear unpaid taxes, the tax authority is bound to sell the property to clear the unpaid taxes.

#3 – Statutory Liens

The statutory liens are acquired through various court proceedings in which the court orders a claim or lien on the asset on any unpaid bills through judgment. There are different kinds of lien sales, but the most common lien is on real estate property and automobiles. In the case of automobiles, generally, it is dealers who sell the vehicles to the public, and banks finance the same. Bank subsequently holds the lien on the vehicle and holds the title.

The following are the possible outcomes of the above transaction if the debtors make the payment to the bank.

  • If the debtor clears the dues to the bank, the lien is removed by the bank on the vehicle, and the ownership is transferred to the debtor.The debtor may default on the loan, which will make the bank repossess the vehicle. The bank will continue to hold the vehicle until someone acquires the same from the bank, in which case the original lien on a vehicle no longer exists.The debtor could not sell the vehicle for which he owes money to the bank, and the bank holds the legal title for the same.

Lien Sale as a Source of Revenue

  • Selling a lien on outstanding debts on a property will subsequently increase the amount owed. The reason is when a state agency sells or local government the lien on the property, the buyer of the lien is supposed to hire a professional lien service agency, for which he would incur an additional cost. The same would be added to the line.The buyer on his investment on lien will collect the charges from debtors, which could take the form of return on investment. The required number of notices are sent to debtors before filing or going for a public auction of the lien on the property. If debtors fail to appear before the agency to clear their respective dues, then the agency will proceed to collect the outstanding dues by selling the lien.

Exceptions to Lien Sale

Some exceptions are not subject to a lien sale. For instance, the persons on active military services, senior citizens, disabled persons, and other veterans are eligible for exemptions from lien sale on properties. The exceptions vary from state to state, and every jurisdiction has its application process, procedures, and the period in which eligible individuals or entities are supposed to contact them.

Conclusion

  • Banks and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more always worry about the money to receive back from the borrower. The existence of lien sales, to some extent, relieves them. In our illustration above, to ward off the tax lien, X should shell out the same amount to the investor being incurred by him, including interest.That’s why investors consider the tax lien an alternative investment tool to get the desired rate of return on investment. To get the property back, the owner will transfer the amount to the respective tax authority, and then the tax authority will transfer the same to the investor who holds a lien on the property.If the property owner fails to make the required payment on unpaid tax, the tax authority will foreclose the property and transfer the legal title to the lienholder, who subsequently becomes the clear and free owner of the concerned property.

This article has guided what Lean Sale is & its Definition. Here we discuss how the process of lien sale works along with its types (construction, statutory, and tax) and exceptions. You can learn more about it from the following articles –

  • Wash Sale Rule DefinitionLessor vs. LesseeShort Sale vs. ForeclosureRevolving Fund