Definition

• A lien is a legal claim against an asset. When you take out a loan or fail to pay an obligation, a lien is filed with the state or county in which you reside or operate, depending on the nature of the collateral. For example, if you are purchasing a home and take out a mortgage to do so, the lender will file a lien against the home.
  
  

Types

• A variety of lien types exist. Real estate liens are the most common. When you take out a mortgage or home equity loan, a lien is placed on the property. When you purchase a vehicle, a lien is placed on the title. On the business side, liens can be taken on business assets, equipment or inventory. Some liens also can be placed involuntarily. For example, if you hire a construction company to work on a piece of property, but fail to make timely payments to the company, it can place a mechanic's lien against your home. Other involuntary liens include judgments and tax liens.
  
  

Filing

• A creditor must file a lien with the appropriate authority to have the right to seize the collateral in the event of nonpayment. The filing authority varies based on the lien. A creditor files mortgage liens, tax liens and mechanic's liens with the county clerk governing the municipality where the property is located. Liens against business assets, equipment and inventory are filed with the state in which the business operates. Motor vehicle liens are handled through the department of motor vehicles in the state where the vehicle is registered.
  
  

Position

• An asset can be encumbered by multiple liens. For example, if you take out a mortgage upon purchasing a home, that mortgage becomes your first lien. If you get a home equity loan several years later, that becomes your second lien. The lien position is determined by the date of filing. The first lien holder has the first right to your asset. If a second lien holder wishes to foreclose, it has to pay the first lender off before proceeding.