Encumbrances and liens commonly occur in real estate; and if you fail to satisfy a debt, a creditor or the Internal Revenue Service may attach a lien or encumbrance to your property. This can prevent the transfer of the property and greatly affects your ability to sell the property. While encumbrances and liens are closely related, it's imperative to understand differences between the two.
Encumbrances refer to any charge or claim against a property. This legal term is commonly used with regards to real estate, but encumbrances also can affect vehicles and other types of personal property. The person or entity that issues the encumbrance acquires a legal right to the property. This encumbrance remains in effect until the actual owner satisfies a debt or resolves the issue with the other party. Because encumbrances create an unclear title, issues can arise upon selling or transferring ownership of the property.
Advertisement Article continues below this adA lien gives a creditor the right to seize or take your personal property if you are unable to keep up with payments or pay off debts. Liens often occur after a creditor -- such as a credit card company, hospital or the IRS -- files a lawsuit and wins a credit judgment. They also include mortgages or car loans. To acquire funds due, the creditor may request additional action and receive a court-ordered lien. Liens take many forms, and creditors may take possession of your bank account or obtain a legal hold on your home.
The terms "encumbrance" and "lien" are often used interchangeably. However, differences do exist. It's important to note that all liens are encumbrances, but not all encumbrances are liens. Encumbrance is a broad term used to describe any claim on another person's personal property. This includes real estate liens, vehicle liens, mechanic liens, bank liens, court judgments and any other claim by another party.
Advertisement Article continues below this adIf a creditor places a lien or encumbrance on your property, you're obligated to disclose this information to potential buyers of the property. Satisfying any financial obligation that affects your property's title contributes to a smooth transaction. Failure to satisfy liens and other encumbrances creates a financial burden for buyers because they inherit the lien or encumbrance upon acquiring the property. Buyers can take legal action against sellers who fail to disclose liens or encumbrances.