The legal term lien refers to a type of security placed on a property that allows a creditor to take possession of the property, if the debtor fails to make their necessary payments and satisfy their debt to the creditor. It is a legal claim attached to a piece of property that specifies the amount owed and grants the creditor the right to be paid out if and when the property is sold.
The most common example is home ownership, as the majority of people take out a mortgage in order to pay for their home. If the debtor fails to make their mortgage payments to the creditor, such as a bank or other lender, then the creditor has the right to place a lien on the property.
In general, liens are public in order to inform creditors about any existing debts. It is generally a formal document signed by either the creditor or the debtor. A lien can act as extra leverage against the debtor so the creditor may ensure payments are made on the loan. However, a lien may also benefit the debtor in that it is meant to provide security to cover their debt and obligations.
The most common examples of how liens may be used are to secure various properties, such as a house or a car. They are used when someone is interested in purchasing a home or a vehicle and borrows a loan to make those payments.
The lender can then use the home or vehicle to serve as a safety, and can foreclose on or repossess the property if the person fails to make their monthly payments. Further, if someone wins a lawsuit against another person, they may be able to collect their damages award through judgement liens.
What is a Blanket Lien?
Blanket lien refers to a type of lien which is placed on all or nearly all of the debtor’s assets. If the debtor defaults on their monthly payments, the creditor holding the blanket lien has the right to take any or all of the debtor’s assets that are covered by the blanket lien.
The creditor also has the right to sell any of those assets and keep the proceeds in order to recover any monetary losses experienced by the debtor’s default on payments. Blanket liens may cover tangible assets, such as office equipment and accounts receivable. Blanket liens also cover intangible assets, such as leases.
A blanket lien may come in two forms. The first form consists of the blanket lien listing all of the types of property that the creditor can collect if the debtor fails to repay the creditor. Such liens are generally phrased as a lien on accounts receivable, or a lien on inventory.
The second form of a blanket lien tends to be much more broad, and can cover all assets that the debtor currently owns or will acquire. Blanket liens that attach to future assets should be carefully considered due to the fact that such liens could limit or totally prevent borrowers from taking out other liens later on. This is because creditors who are unable to attach liens are often unwilling to provide credit to borrowers.
Blanket liens are most commonly utilized in short-term business financing situations. They are typically established by a contract. However, they are subject to certain limitations and are not ideal for all situations or borrowers, as previously mentioned. As with any lien, the borrower should carefully consider their options before signing a contract.
As the name suggests, blanket liens cover a wide range of assets. There are certain exceptions to what a blanket lien can and cannot cover. The most significant exception is that blanket liens cannot secure any property that would require government consent. Some examples of this include:
- Business licenses, such as those issued to independent contractors;
- Patents, such as utility or design patents;
- Trademarks, such as a service mark or certification mark; and
- Other government issued permits.
Payroll deposit accounts are another example of what a blanket lien cannot cover. If an account is used exclusively for the purpose of paying employees, and/or payroll withholding taxes, the creditor cannot access the account. Payroll deposit accounts are held in trust on behalf of the employees, and as such even the borrower themselves have no right to offer such accounts as collateral when securing a lien.
What Else Should I Know About Liens and Blanket Liens?
Generally, a lien holder is the only party able to remove a lien. Some exceptions include:
- Paying the debt owed in order to remove the lien;
- Negotiating to settle with the creditor;
- Having the lien corrected in some way; and/or
- The statute of limitations on the lien runs out before the creditor takes any action.
If a debtor files a Chapter 7 bankruptcy, they have the right to exempt certain property from creditor collection. They may avoid or nullify any liens which impair certain debtor exemptions. Some examples include:
- Household furnishings;
- Household goods;
- Musical instruments;
- Tools of their trade; and
Do I Need an Attorney for Issues with a Blanket Lien?
Blanket liens may be hard to spot in a contract, and are difficult to remove. If you are facing a blanket lien and/or repossession, you should consult with a skilled and knowledgeable financial attorney.
An experienced bankruptcy attorney can help you understand your various legal options and rights. Finally, an attorney can file any necessary legal paperwork on your behalf, as well as represent you in court as needed.