A perfected lien is a lien that has satisfied all the criteria, including filing with the appropriate agent, to become valid and enforceable. These liens are filed by a creditor against a debtor in the event that they fail to repay the debt.
Definition and Examples of Perfected Liens
A perfected lien—a hold against real or personal property—is one that has met all the applicable criteria to become legally enforceable. These holds grant an interest in the property in the event you fail to repay the debt.
In essence, the lien is a security interest in your property; this means you cannot dispose of or sell the property without repaying your debt. A perfected lien legally guarantees that security interest.
Here are some common types of liens:
- Real estate lien: Usually included when taking out a mortgage
- Mechanic or construction lien: Filed by a contractor or laborer for unpaid home improvements or auto repairs
- Car lien: Applied when financing a vehicle
- Tax lien: Given first priority over other liens; occurs when you fail to pay your taxes
- Judgment lien: Involuntary lien against your property or assets for unpaid debts
Liens can be voluntary, such as a deed of trust, or involuntary, such as a judgment lien.
How a Perfected Lien Works
If you’ve ever financed a car or home, you would have heard of a lien. A lien is simply a way for a creditor to secure their interest in your property in case you’re unable to pay your debts.
Liens aren’t necessarily a bad thing; they’re meant to protect the creditor and offer a legal guarantee to do so. Consensual liens occur when you buy a car whether you’re using dealer financing or have opted for a loan through your bank.
Let’s say you’re in the middle of purchasing a brand new car from a dealership. You’ve chosen to take advantage of the dealer’s 0% financing for 72 months, making your payments more than affordable.
As you’re signing the paperwork, you come across documents for registering the car with the Department of Motor Vehicles. It’s pretty convenient that your dealer has provided the ability to register for your title while you’re buying the car.
In reality, the dealer isn’t necessarily being altruistic. When it comes to car liens, they’ll only become perfected once you’ve registered and titled the car with the DMV. At that point, your lender will be noted on the title as a lienholder. Until that process happens, the lender is unsecured and at risk if you default on the loan.
You’ll need to clear the lienholder off your title if you’re looking to sell your car. The process for this varies, so check with your state’s Department of Motor Vehicles for details.
What Does a Perfected Lien Mean For You?
In many circumstances, a perfected lien won’t affect your everyday life. It’s only when you become unable—or unwilling—to pay off your debt that a perfected lien will come into play.
Perfected liens are valid and legally enforceable, which means your creditor will be able to use if in order to secure repayment. This is true whether your lien is consensual or non-consensual.
In the event you do end up falling behind on payments, the perfected lien gives your creditor the legal right to seize your assets or property in order to recoup their funds.
When defaulting on a mortgage, for example, the lender has already established that you cannot sell your property without clearing their lien. Once you’ve defaulted, they can also force a foreclosure, making you sell your home so that the proceeds can be used toward paying your debt.
- A perfected lien is a lien that has met all the requirements to be legally enforceable.
- A perfected lien secures a creditor’s interest in a property.
- Liens are holds against your property that protect a lender in the event you default on your debt.