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 agency sale the lien on the property and collect the proceeds to clear the outstanding taxes, or amount 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 is in possession of lien.
- However, he could demand the surcharge 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 various other personal properties.
- To illustrate lien sale, vendors, contractors, or suppliers can hold claim or lien on the part of the property they had operated on for the outstanding amount due to services being rendered.
How the Process of Lien Sale Works?
- To illustrate 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 due to which he could not shell out the $5,000 to the tax authority even after the number of notices being sent to X.
- Tax authority initiates 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. is a document which tax authority present as a 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., the owner could not legally transfer or sell the property until the unpaid taxes are cleared. In case of owner remain reluctant to clear his outstanding taxes for long enough, the tax authority can take possession of the property and sell the same to recover the unpaid taxes by conducting the 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 owner of the property, 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:
#1 – Construction Liens
In the construction lien, the contractor hold 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 tax lien, the tax authority takes possession of the property for which property tax is due. If the owner failed to clear unpaid tax, 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 court orders claim or lien on the asset on any unpaid bills through judgment. There are different kinds of lien sale in existence, but the most common lien is placed on real estate property and automobiles. In the case of automobiles, generally, it is dealers who sell the vehicles to the public and bank finance the same. Bank subsequently holds the lien on the vehicle and holds the title.
The following are the possible outcome of the above transaction if the debtors make the payment to the bank.
- In case 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 acquire 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 stands owed. The reason being when a state agency sells or local government the lien on the property, the buyer of 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 lien.
- The buyer on his investment on lien will collect the charges from debtors which could take the form return on investment. The required number of notices are being sent to debtors before filing or going for 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
There are some exceptions which are not subject to a lien sale. For instance, the persons who are 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.
- 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. are always worried about the money to receive back from the borrower. The existence of lien sale, to some extent, relieves them. In our illustration above, to ward off the tax lien, X is supposed to 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. The owner to get the property back will transfer the amount to the respective tax authority, and then tax authority will transfer the same to the investor who holds a lien on the property.
- If the owner of the property failed to make the required payment on unpaid tax, the tax authority foreclosure the property and transfer the legal title to the lienholder who subsequently become the clear and free owner of the concerned property.
This article has been a guide to What is Lean Sale & 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 from the following articles –