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Understanding the Assignment of Mortgages: What You Need To Know

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A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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Assignments vs. Liens In the Personal Injury Context

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A large number of people, attorneys included, don’t know the difference between “assignments” and “liens.”

Why does it matter, you ask? For a number of reasons that will be more obvious when the difference is understood.

An assignment is the easier of the two to understand since, as the name implies, it is an transfer of all or some rights or property to a third-party. Although an assignor cannot ever assign more rights or property than it holds, it can assign less than all of the rights or property subject to the assignment.

An assignment is bears the hallmarks of ownership . That is, an assignee steps into the assignor’s shoes and has the ability to control the rights or property subject to the assignment. This means that the assignee can further assign the rights or property, can sell them, donate them, pledge them as collateral or simply enjoy the rights or property as though they were his or her own; subject, of course, to restrictions in the assignment agreement.

Here is where it will get tricky: an assignment can, in effect, extinguish an obligation to one party by transferring the obligation to another party.

Take, for example, a debt. Assume you owe a friend $10,000 for a car that you bought from him, and you agree to pay it of at a rate of $1,000 a year for 10 years. After two years, however, your friend decides that he really needs money and so he assigns the remaining $8,000 debt to me for $5,000 immediate cash. The debt to your friend is now, in effect, extinguished and transferred to me – that is, you owe me the $8,000.

You may not realize it, but a personal injury claim is a bundle of property rights, and to make matters a little more confusing, some states prohibit assignment of personal injury claims. Now, understand, this is a seemingly narrow restriction and assignment of other rights (such as debts) and property (such as cars) are fully assignable in every state.

What this anti-assignment law in the personal injury context means is that you cannot assign to someone a claim for bodily injury to a third-party. Remember, you can still assign the part of the case that corresponds to property damage, such as damage to your vehicle or personal belongings, and you can still assign any non-bodily injury claims, such as breach of contract or bad-faith.

Now keep that all in mind. What is a lien?

A lien is “[a] charge or encumbrance upon property to secure the payment or performance of a debt, duty or other obligation,” and it “ is distinct from the obligation which it secures .” Matlow v. Matlow , 89 Ariz. 293, 297-98, 361 P.2d 648, 651 (1961) (citing 53 C.J.S. Liens § 1, at 826). In Arizona, a lien can be created by statute, but an equitable lien may also arise from an express contract if the parties indicate an attempt to charge particular property as security for an obligation. Kalmanoff v. Weitz , 8 Ariz.App. 171, 172, 444 P.2d 728 (1968).

Unlike assignments, there is no prohibition on liens against personal injury cases, but this subject matter creates a great deal of confusion. Admittedly, what has contributed to the confusion is that the law has undergone centuries of perversion and that it is sometimes hard to tell the difference between an assignment versus a lien on a personal injury claim.

The courts examining this issue have often overlooked the distinction and, typically, have incorrectly deemed simple liens to be prohibited assignments without examining the real character of the transaction. To be sure, there are decisions that uphold standard (non-statutory) medical liens between a doctor and patient for services, and opinions which preclude insurance companies from recouping payment made to those same doctors as being impermissible assignments. These decisions are irreconcilable and fail to appreciate the difference between an assignment versus a lien on a personal injury claim.

Simply put, such arrangements – e.g. , where someone is due money for services rendered – are permissible liens on a personal injury claims. That is, where an injured person owes money to a third-party and agrees to secure the debt with an encumbrance upon proceeds in a personal injury claim, the third-party does not own or control the personal injury claim (as they would had there been an assignment) and the personal injury claim remains “distinct from the obligation which it secures.” The third-party has no say in how the claim is handled, does not need to assent to the settlement of the claim and will not be a party to signing a release of such a claim, which would be hallmarks of an assignment. To the contrary, if the injured party loses the personal injury suit, the “distinct . . . obligation” remains and must still be satisfied (absent an agreement making the debt or obligation contingent upon an event, such as prevailing in a personal injury action). In contrast, assignment of a losing claim would always result in an assignee receiving nothing (with the obligation having been extinguished upon the assignment).

Due to the anti-assignment case law, which is inconsistently applied, this causes confusion in personal injury cases. Although we are not going to ever resolve the issue here, it helps to remember the reason for anti-assignment law in the personal injury context is to prevent “trafficking in personal injury claims.” That is, the courts long ago decided that it was not acceptable for people to market in buying and selling personal injury actions, ostensibly because of the unsavory possibilities of having injured people victimized by those wishing to purchase such rights. In reality, it has more to do with the image of justice and the likelihood that it would encourage fraudulent personal injury claims.

Ironically, the quiet exception to the rule prohibiting assignment of personal injury claims is that attorneys are permitted to take contingency fees on personal injury claims, which (if you believe what you read about other so-called impermissible assignment arrangements) is nothing more than an assignment of a personal injury claim. It used to be that such arrangements were considered impermissible, but after many years the courts relented an allowed contingency fee arrangements in all but criminal and divorce proceedings. In those cases, courts still felt that there was too must risk to allowing contingency fees — that contingency fees would encourage unethical or unsavory conduct in criminal and divorce cases.

The reason contingency fees are allowed to attorneys, however, is to open the door to parties who would not otherwise be able to afford paying for attorneys on an hourly basis. And, most often, the same reason underlies lien arrangements for injured persons, whether it be health insurance liens, contractual doctors liens, liens for pharmaceutical expenses, liens for rental cars or liens for cash advanced to pay bills. Accordingly, although courts have long misunderstood and confused the difference between impermissible assignments and permissible liens, the simple fact is that such liens are a necessary element in modern personal injury practice to provide immediate care and compensation to impecunious injured parties who cannot afford to battle for years with an insurer for a tortfeasor. Such arrangements to not give rise to the concerns underlying the old anti-assignment laws and, in fact, do not reveal ownership characteristics of assignments.

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Mortgage Assignment Laws and Definition

(This may not be the same place you live)

  What is a Mortgage Assignment?

A mortgage is a legal agreement. Under this agreement, a bank or other lending institution provides a loan to an individual seeking to finance a home purchase. The lender is referred to as a creditor. The person who finances the home owes money to the bank, and is referred to as the debtor.

To make money, the bank charges interest on the loan. To ensure the debtor pays the loan, the bank takes a security interest in what the loan is financing — the home itself. If the buyer fails to pay the loan, the bank can take the property through a foreclosure proceeding.

There are two main documents involved in a mortgage agreement. The document setting the financial terms and conditions of repayment is known as the mortgage note. The bank is the owner of the note. The note is secured by the mortgage. This means if the debtor does not make payment on the note, the bank may foreclose on the home. 

The document describing the mortgaged property is called the mortgage agreement. In the mortgage agreement, the debtor agrees to make payments under the note, and agrees that if payment is not made, the bank may institute foreclosure proceedings and take the home as collateral .

An assignment of a mortgage refers to an assignment of the note and assignment of the mortgage agreement. Both the note and the mortgage can be assigned. To assign the note and mortgage is to transfer ownership of the note and mortgage. Once the note is assigned, the person to whom it is assigned, the assignee, can collect payment under the note. 

Assignment of the mortgage agreement occurs when the mortgagee (the bank or lender) transfers its rights under the agreement to another party. That party is referred to as the assignee, and receives the right to enforce the agreement’s terms against the assignor, or debtor (also called the “mortgagor”). 

What are the Requirements for Executing a Mortgage Assignment?

What are some of the benefits and drawbacks of mortgage assignments, are there any defenses to mortgage assignments, do i need to hire an attorney for help with a mortgage assignment.

For a mortgage to be validly assigned, the assignment document (the document formally assigning ownership from one person to another) must contain:

• The current assignor name.
• The name of the assignee.
• The current borrower or borrowers’ names. 
• A description of the mortgage, including date of execution of the mortgage agreement, the amount of the loan that remains, and a reference to where the mortgage was initially recorded. A mortgage is recorded in the office of a county clerk, in an index, typically bearing a volume or page number. The reference to where the mortgage was recorded should include the date of recording, volume, page number, and county of recording.
• A description of the property. The description must be a legal description that unambiguously and completely describes the boundaries of the property.

There are several types of assignments of mortgage. These include a corrective assignment of mortgage, a corporate assignment of mortgage, and a mers assignment of mortgage. A corrective assignment corrects or amends a defect or mistake in the original assignment. A corporate assignment is an assignment of the mortgage from one corporation to another. 

A mers assignment involves the Mortgage Electronic Registration System (MERS). Mortgages often designate MERS as a nominee (agent for) the lender. When the lender assigns a mortgage to MERS, MERS does not actually receive ownership of the note or mortgage agreement. Instead, MERS tracks the mortgage as the mortgage is assigned from bank to bank. 

An advantage of a mortgage assignment is that the assignment permits buyers interested in purchasing a home, to do so without having to obtain a loan from a financial institution. The buyer, through an assignment from the current homeowner, assumes the rights and responsibilities under the mortgage. 

A disadvantage of a mortgage assignment is the consequences of failing to record it. Under most state laws, an entity seeking to institute foreclosure proceedings must record the assignment before it can do so. If a mortgage is not recorded, the judge will dismiss the foreclosure proceeding. 

Failure to observe mortgage assignment procedure can be used as a defense by a homeowner in a foreclosure proceeding. Before a bank can institute a foreclosure proceeding, the bank must record the assignment of the note. The bank must also be in actual possession of the note. 

If the bank fails to “produce the note,” that is, cannot demonstrate that the note was assigned to it, the bank cannot demonstrate it owns the note. Therefore, it lacks legal standing to commence a foreclosure proceeding.

If you need help with preparing an assignment of mortgage, you should contact a mortgage lawyer . An experienced mortgage lawyer near you can assist you with preparing and recording the document.

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Lien vs. Pledge

What's the difference.

Lien and pledge are both legal concepts that involve the granting of a security interest in property to secure a debt or obligation. However, there are some key differences between the two. A lien is a legal claim or encumbrance on property that gives the creditor the right to take possession of the property if the debtor fails to fulfill their obligation. It does not involve the transfer of ownership of the property. On the other hand, a pledge involves the transfer of possession of the property to the creditor as collateral for the debt. The creditor holds the property until the debt is repaid, at which point the ownership is transferred back to the debtor. In summary, while both lien and pledge provide security for a debt, a lien does not involve the transfer of possession or ownership, whereas a pledge does.

Further Detail

Introduction.

When it comes to securing a loan or debt, lenders often require borrowers to provide some form of collateral to mitigate the risk of default. Two common methods of securing collateral are through a lien or a pledge. While both serve the same purpose, there are distinct differences in their attributes and legal implications. In this article, we will explore the characteristics of liens and pledges, their advantages and disadvantages, and the circumstances in which each may be preferred.

Definition and Nature of Lien

A lien is a legal right or claim over a property or asset granted to a creditor as security for a debt or obligation. It allows the creditor to take possession of the property or asset if the debtor fails to fulfill their obligations. Liens can be voluntary or involuntary, depending on whether they are created by the debtor's consent or by operation of law.

One of the key attributes of a lien is that it does not transfer ownership of the property or asset to the creditor. Instead, it provides the creditor with a right to satisfy their debt by selling the property or asset and using the proceeds to recover the outstanding amount. The debtor retains ownership until the debt is fully repaid or discharged.

Liens can be categorized into various types, such as statutory liens, judgment liens, tax liens, and consensual liens. Each type has its own set of rules and requirements, depending on the jurisdiction and the nature of the debt or obligation.

Definition and Nature of Pledge

A pledge, on the other hand, is a type of security interest where the debtor transfers possession of a property or asset to the creditor as collateral for a debt. Unlike a lien, a pledge involves the actual transfer of possession, giving the creditor direct control over the pledged asset.

By transferring possession, the debtor demonstrates their commitment to fulfilling their obligations, as defaulting on the debt would result in the creditor gaining ownership of the pledged asset. This direct control over the asset provides the creditor with a higher level of security compared to a lien, as they can sell or dispose of the asset without the need for a legal process.

Pledges are commonly used in financing arrangements, such as secured loans or lines of credit, where the lender requires tangible assets as collateral. The pledged assets can include real estate, vehicles, inventory, or even financial instruments like stocks or bonds.

Advantages and Disadvantages of Lien

Liens offer several advantages for both creditors and debtors. For creditors, liens provide a legal claim over the property or asset, ensuring a higher chance of recovering their debt in case of default. It also allows them to prioritize their claim over other unsecured creditors in the event of bankruptcy or insolvency.

Debtors benefit from liens as they can retain ownership and possession of the property or asset while still using it for their business or personal needs. This flexibility can be crucial, especially when the collateral is essential for generating income or maintaining a livelihood.

However, liens also have their drawbacks. From the creditor's perspective, enforcing a lien can be a time-consuming and costly process. Legal proceedings may be required to sell the property or asset, and the creditor may face challenges if other creditors have competing claims or if the debtor files for bankruptcy.

For debtors, the presence of a lien can limit their ability to use the collateral for other purposes or obtain additional financing. The lien may also negatively impact their creditworthiness, making it more difficult to secure future loans or credit facilities.

Advantages and Disadvantages of Pledge

Pledges offer distinct advantages and disadvantages compared to liens. For creditors, the main advantage of a pledge is the direct control and possession of the pledged asset. This reduces the risk of the debtor disposing of the asset without the creditor's knowledge or consent, providing a higher level of security.

Additionally, in case of default, the creditor can quickly sell or liquidate the pledged asset without the need for lengthy legal proceedings. This expedites the debt recovery process and minimizes potential losses for the creditor.

Debtors may find pledges advantageous as they can often negotiate more favorable loan terms or interest rates due to the increased security provided by the direct transfer of possession. Furthermore, if the debtor fulfills their obligations, they regain full ownership and control of the pledged asset.

However, the main disadvantage of a pledge for debtors is the potential loss of the pledged asset in case of default. Unlike a lien, where the debtor retains ownership until the debt is satisfied, a pledge grants the creditor immediate ownership rights upon default. This can be particularly problematic if the pledged asset holds significant personal or sentimental value.

Choosing Between Lien and Pledge

The choice between a lien and a pledge depends on various factors, including the nature of the debt, the value and type of collateral, and the preferences of both the creditor and debtor. In some cases, the law or regulations may dictate the type of security interest that can be used for specific types of debts.

If the debtor wishes to retain ownership and possession of the collateral while still using it for their purposes, a lien may be more suitable. This is often the case when the collateral is essential for the debtor's business operations or personal use.

On the other hand, if the creditor requires direct control and possession of the collateral to ensure a higher level of security, a pledge may be the preferred option. This is common in financing arrangements where the creditor wants immediate access to the pledged asset in case of default.

Ultimately, the decision should be based on a thorough assessment of the risks and benefits associated with each type of security interest, as well as the specific circumstances and requirements of the parties involved.

Liens and pledges are both valuable tools for securing debts and obligations. While liens provide a legal claim over a property or asset without transferring ownership, pledges involve the actual transfer of possession to the creditor. Each method has its own advantages and disadvantages, and the choice between them depends on various factors, including the nature of the debt and collateral, as well as the preferences of the parties involved. Understanding the attributes and implications of liens and pledges is crucial for both creditors and debtors to make informed decisions and protect their interests.

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Lien vs. Encumbrance: What's the Difference?

J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

Lien vs. Encumbrance: An Overview

A lien represents a monetary claim levied against property to secure payment—the settlement of an obligation from the property owner. An encumbrance is a much broader term, referring to any sort of claim against a property. Any lien is an encumbrance, but not all encumbrances are liens.

Key Takeaways

• A lien is a monetary claim against property intended to ensure payment.
• Any lien is an encumbrance, but the reverse is not always true.
• Encumbrance refers to any claim against a property, not just one to ensure payment.

Investopedia / Sabrina Jiang

A lien is a legal right granted by the owner of a property, by a law, or otherwise acquired by a creditor . A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.

Liens always represent a financial interest. A lien often results from secured loans such as auto loans and mortgages. It effectively gives the creditor the right to seize and sell the property that the creditor has a lien against to satisfy the outstanding debt. A common example: If a person fails to make the payments on a car loan, it can lead to the financing company repossessing and selling the car to obtain payment. Another type of common lien is a judgement lien resulting from a lawsuit initiated by a creditor . Upon winning the suit, a creditor can have a lien placed on the debtor's property in order to facilitate repayment of the debt. Liens may even include the right to attach funds in the debtor's bank account.

Liens attached by tax agencies are specifically referred to as tax liens . A federal tax lien is notable in that it takes precedence over any other claims by creditors, in most cases.

Encumbrances

An encumbrance is a claim against a property by a party that is not the owner. An encumbrance can affect the transferability of the property and restrict its free use.

Encumbrances are not necessarily monetary, but they also include property use restrictions or easements . Encumbrances can be any interest in the property that burdens or reduces the property's value or clear title .

Easement is a real estate concept that defines a scenario in which one party uses the property of another party, where a fee is paid to the owner of the property in return for the right of easement. Easements are often purchased by public utility companies for the right to erect telephone poles or run pipes either above or beneath private property.

However, while fees are paid to the property owner, easements can negatively affect property values. For example, unsightly power lines can lower the visual appeal of a piece of land.

Special Considerations

Liens and encumbrances are most commonly associated with real estate , but either one may be applied to personal property as well. If an individual fails to pay a debt, then a creditor or tax agency may attach a lien or an encumbrance to the individual's property. Having such a claim against the property creates an unclear title and can limit the ability to sell or otherwise transfer the property.

Any existing encumbrance is required to be disclosed by the owner of the property to potential buyers. A buyer will inherit the encumbrance upon purchasing the property. If a seller does not disclose existing encumbrances, he is subject to legal action by the buyer for his failure to do so.

Internal Revenue Service. " Priority of Federal Tax Lien: “First in Time, First in Right” ."

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Lien Assignment Process and Procedure

The lien assignment process almost always begins with the owner’s mortgage lender (i.e. bank) commencing a foreclosure on its first deed of trust.  Prior to the bank proceeding to foreclosure sale, it must submit a bid to the Public Trustee’s office.  At that time, investors review the bank’s bid and determine if they would be interested in paying off the bank in exchange for acquiring the property.  This is usually about the same time that investors obtain title work on the property and contact the association, its management company or our office to inquire about the potential purchase of the association’s lien.  Most investors realize that even if no recorded lien exists, the association  still may have an assignable lien by operation of Colorado Common Interest Ownership Act.

Assuming the investor gets in touch with our office (whether directly or following a referral from the manager or association), our firm will contact the board or management company for an updated ledger on the property.  We then review the ledger and add in any time that may have been written off because of a bankruptcy and additional attorney fees that are not yet reflected on the ledger.  We use this information to formulate a lien sale price.  In some instances we will attempt to sell the lien for more than the total amount owed, but we always assign the lien for at least payment in full through the current month.  Following an agreement with an investor to purchase the lien, our office processes the lien sale through the execution of a lien assignment document.  This document sets forth the legal rights and obligations between the investor and the association and allows the investor to acquire property through a redemption process.

If the lien is sold, the association receives payment in full (or occasionally, more than payment in full) and the investor receives all rights associated with the association’s lien.  The investor takes the completed lien assignment to the Public Trustee and files what is known as an Intent to Redeem.  This document tells the Public Trustee that the investor has purchased the association’s lien and corresponding right to redeem at the Public Trustee’s sale.  The investor then tenders payment to the Public Trustee for all amounts owed to the foreclosing lender.  This process is known as redemption.

Following a successful redemption, the investor will take title to the property and will be issued a Public Trustee’s Deed.  This Deed confirms that the investor now owns the property.  It is important to remember that the Public Trustee’s Deed is sometimes issued several weeks after the investor actually takes legal title to a property.  Technically, legal title transfers once all applicable redemption periods expire.  Associations should contact our office if there are any questions about the actual date that a title transferred to an investor.

Usually, investors that acquire association liens through the lien assignment process are interested in rehabilitating the property and reselling it relatively quickly.   However, during the time the investor owns the property, he or she is subject to all the same covenants as any other owner, including the obligation to pay assessments.

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Lien Vs Pledge : Understanding the Key Differences

When navigating the intricate world of finance, we often encounter terms like ‘lien’ and ‘pledge,’ akin to puzzle pieces that form the larger picture of financial transactions. Picture this: your assets locked in a financial dance, one holding on firmly (lien), the other standing as a solemn promise (pledge). 

A lien represents a legal right to possess or sell the debtor’s property in the case of non-payment. Conversely, a pledge involves the delivery of possession of a property to the lender, serving as collateral until the obligation is fulfilled. Now, let’s delve into these financial safeguards.

Table of Contents

Lien Vs Pledge (A Comparison)

• Pledge vs. Hypothecation
• Pledge vs. Collateral
• Overdraft vs. Loan

What is a Lien?

A lien, essentially a legal right, empowers a creditor to seize and sell a debtor’s property if they fail to meet their financial obligations. This legal claim acts as a protective shield for lenders, ensuring they have recourse in the face of default. 

In essence, it establishes a legal foundation that safeguards the financial interests of the creditor, reinforcing the integrity of lending transactions.

Types of Liens

• Specific Lien: A specific lien is tied to a particular asset or property, offering creditors a claim over that specific item.
• General Lien: In contrast, a general lien extends its reach across all the debtor’s assets. This broader claim is common in scenarios like business loans, where various assets contribute to the security of the loan.

What is a Pledge?

A pledge involves the physical delivery of possession of a property to the lender as collateral, adding an extra layer of security. This tangible commitment ensures that the lender can access and, if necessary, liquidate the pledged asset to recover the loan amount.

Types of Pledges

• Possessory Pledge: In this form, the lender physically possesses the pledged asset. A common example is when a borrower pledges jewelry to a pawnbroker, allowing the lender to hold the item until the loan is repaid.
• Non-Possessory Pledge: Unlike possessory pledges, non-possessory pledges don’t involve the lender physically holding the asset. Instead, legal documentation confirms the pledge, offering security without the necessity of transferring the asset.

Key Differences Between Lien and Pledge

Here are five key distinctions that shape their roles in securing transactions:

Possession vs. Claim:

• Lien: A lien doesn’t necessitate the physical possession of the debtor’s property. Instead, it grants the creditor a legal claim over the property. The creditor can enforce this claim through legal means without taking actual possession of the asset.
• Pledge: In a pledge, possession is a crucial aspect. The lender has physical control over the pledged asset until the borrower fulfills their financial obligation. This possession provides an immediate avenue for the lender to recover their funds.

Transfer of Ownership:

• Lien: A lien doesn’t involve the transfer of ownership. The debtor retains ownership of the property, and the lien is a legal encumbrance on that property. The creditor’s rights are limited to the recovery of the owed debt through the identified property.
• Pledge: While possession is transferred in a pledge, ownership remains with the borrower. The lender has the right to possess and sell the asset only in the event of default. Once the debt is repaid, ownership reverts to the borrower.

Applicability:

• Lien: Liens are versatile and can apply to a broad range of assets. From real estate to financial assets, liens can secure various types of transactions, making them a flexible tool in financial agreements.
• Pledge: Pledges are often more specific and are commonly used for tangible assets like jewelry, securities, or valuable goods. The tangible nature of the pledged asset makes it well-suited for certain types of transactions.

Enforcement Process:

• Lien: Enforcing a lien typically involves legal proceedings. The creditor must go through the legal system to seize or sell the property tied to the lien. This process can be time-consuming and may vary based on jurisdiction.
• Pledge: Enforcement of a pledge is often more straightforward. The lender, holding physical possession, can quickly liquidate the pledged asset in the event of default, streamlining the enforcement process.

Practical Applications

In the corporate world, liens and pledges play pivotal roles. Liens secure loans, while pledges, with their tangible commitment, are vital in scenarios like securing business loans or financing expansions.

The impact of these financial safeguards is felt on both ends. Borrowers benefit from enhanced credibility, while lenders gain a safety net against potential defaults. It’s a symbiotic relationship balancing risk and trust.

When drafting contractual agreements, understanding the implications of choosing a lien or a pledge is crucial. Legal nuances, the nature of assets, and the overall financial strategy should be meticulously considered to ensure a robust and fair arrangement.

As we wrap up this exploration of liens and pledges, it becomes clear that these financial safeguards are the unsung heroes of financial stability. Whether it’s the expansive reach of a general lien or the tangible commitment of a possessory pledge, these instruments serve as the bedrock of trust in the intricate dance of finance. 

As you navigate your financial journey, may the understanding of liens and pledges be your guiding light, ensuring a secure and well-informed path forward.

Basir Saboor

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Difference Between Assignment and Transfer

The difference between assignment and transfer is that assign means it's legal to transfer property or a legal right from one person to another. 3 min read updated on February 01, 2023

The difference between assignment and transfer is that assign means it's legal to transfer property or a legal right from one person to another, while transfer means it's legal to arrange for something to be controlled by or officially belong to another person.

When used as verbs, assign means to set apart or designate something for a purpose while transfer means to pass or move from one person, place, or thing to someone or someplace else. When used as nouns, assign means the assignee and transfer is the act of removing or conveying something from one person, thing, or place to another. Transfer generally refers to titles whereas assignment is used with obligations and rights.

Definitions of Assignment and Transfer

• Assignment: Assignment is used in real estate law and contracts law. It covers the transfer of rights held by the assignor to the assignee.
• Transfer: To remove or convey from one person or place to someone or somewhere else.

Distinction Between Assignment and Transfer

When distinguishing between assignment and transfer, take licenses, for example. Licenses are contracts that don't allow legal action for infringement. They fall under state law. Therefore, state law will decide whether the license is an obligation or right that can be transferred or assigned legally.

One way to distinguish this example is that an individual contract under an agreement cannot be assigned, like entitlement to grant back royalties . In addition, the contract cannot be transferred. You need to break it down and figure out what the actual issue is — the parties' intent. An additional distinction is when the contract holder is an entity and the business owners want to transfer a portion or all of their stock. This can be seen as an implied transfer of the whole contract. However, it would not likely be an assignment of the rights covered under this agreement.

Difference Between Assign and License

The key difference between assign and license is that with a license, the person who grants permission, known as the licensor, keeps an interest in the product being licensed . In an assignment, the assignor will transfer his or her rights to the product or property being assigned.

Another difference is that assignments must be in writing and a license can be executed without being written. Consider, for example, intellectual property such as patents. Patents can be licensed verbally in some instances, but assignments for patents must be in writing and filed with the United States Patent and Trademark Office .

Assignments grant the assignee full ownership of a product or property. Therefore, an assignment will typically cost more to acquire than a license.

Frequently Asked Questions

Are there ever situations in which a license can be transferred but is not assignable?

• Yes, in the case of allowing an assignment to one of your affiliates, the assignor would still be liable for the performance of the agreement under general assignment law. In this situation, you would not typically permit a transfer, because in a transfer, the person transferring would not maintain any obligations related to performance. Don't rely solely on this general understanding, but still expressly detail your agreement on what a licensee can legally do.

How will transfer and assignment rights affect someone's ability to sublicense?

• In theory, if a licensee has the authority to assign license rights to someone else, you could argue that it also provides the right to sublicense it. The issue here is that with a sublicense, the person sublicensing it keeps a license right, therefore effectively creating two licensees. With an assignment, only one right is assigned, and the assignee is the one who has possession of the license. With well-drafted licenses, the right to sublicense is not typically implied, as the licensor is the one who reserves all rights that are not expressly granted.

What is the effect of poorly drafted licenses?

• A poorly drafted license could result in giving someone implied rights to also sublicense. An example is a software license that allows a licensee to access the software without clarifying any restrictions or clearly defining the word “use.” This means that, depending on what this software is supposed to do, someone could think the term “use” means the licensee has permission to grant a sublicense as part of their usage rights.

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Lien Rights: To Assign or Not to Assign (Should you ask the question?)

• By Michael Swartz,

Assignment of lien is a powerful but underused section of Ontario’s Construction Act . Assignment allows a party with lien rights to transfer their rights (and rights to any related court lawsuit or arbitration) to a third party. Unlike many other sections of the Construction Act that contain detailed and specific rules, the Construction Act does not provide much in the way of guidance to parties considering making or taking assignment of a construction lien, except that the assignment must be made in writing. This provides parties with broad latitude to create assignment arrangements that fit their individual needs.

What is assignment of construction lien rights?

Lien rights are a remedy available to those who supply services and/or materials to construction projects in Ontario. A party who has construction lien rights has a unique form of security for claims of non-payment in the form of a charge on the project property and on any holdbacks that are retained from payments on the project, or a charge on any security posted into court to remove the lien from title to the property.

Lien rights arise on the supply of services and/or materials to an improvement to a property and are for the price of the service and/or materials supplied. Construction lien rights are governed by the rules and procedures contained in the Construction Act . Subject to certain exceptions, a claim for lien is typically registered on title to the property to which the party with lien rights supplied the services and/or materials.

An assignment is the process by which Party A, who has a claim, account receivable, or some other legal right or benefit (including construction lien rights), transfers that legal right or benefit to Party B. Often, Party B will provide some sort of benefit to Party A in return for the assignment of legal rights, such as a payment of money and/or as part of a settlement. As discussed above, the Construction Act specifically allows for lien rights to be assigned to a third party.

Why assign construction lien rights?

Assignment has several benefits for the party with the lien rights. If you have lien rights, the assignment of those rights may be part of a settlement arrangement allowing you to be paid more quickly. Assignment also allows you avoid the time, expense, and risk of litigation. It allows you to move on from the claim, except for any assistance you may agree to provide the party who is taking assignment of the lien rights.

Assignment can also be beneficial for the party taking assignment of the lien rights. In complex disputes with multiple parties and claims, it can simplify and consolidate the dispute by allowing one party to take control of the claims. For example, in construction projects with multiple owners, assignment may allow one owner to clear title to their property while advancing the claim against the other owners. A contractor could also take assignment of claims from its subcontractors and advance the claims together up to the owner.

Assignment can also be helpful as a means for an insurer or surety to take control of a claim and recover amounts paid out to an insured.

What do you need to do for an assignment?

The only direct rule in the Construction Act with respect to assignment is that the assignment must be in writing. Courts have held that this is a requirement for a valid assignment. While this one rule may seem simple, an assignment agreement written on the back of a napkin likely will not be sufficient. There are many considerations that need to carefully be taken into account, including:

• the lien rights are valid and capable of being assigned under the Construction Act ;
• proper protections are in place for both the party assigning the lien rights and the party taking assignment of the lien rights;
• the assigning party’s assistance with any litigation relating to the lien claim is properly addressed;
• the proper steps are taken to ensure the party taking the assignment can advance a lawsuit or arbitration relating to the lien claim, if necessary; and
• where the assignment is part of a settlement, that the terms of the settlement are agreed and properly documented.

For assistance regarding the assignment of lien rights, or with construction liens, disputes, and contracts more generally, please contact Michael Swartz and Paul Conrod .

The information and comments herein are for the general information of the reader and are not intended as advice or opinion to be relied upon in relation to any particular circumstances. For particular application of the law to specific situations, the reader should seek professional advice.

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• Life Insurance

What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

Kilito Chan / Getty Images

If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

• If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
• With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

• Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
• Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

• Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
• Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
• Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

• Life insurance can help you get approved for a loan when you use a collateral assignment.
• If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
• With permanent insurance, your lender can cash out your policy to pay down your loan balance.
• An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
• Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

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What Is the Difference Between Collateral & a Lien?

How to Create a Voluntary Lien for a Home Property

What's the difference between a lien and collateral? "Collateral" and "lien" are terms that go together, but they're essentially different parts of the same machine. A lien is an interest that a lender has on a piece of property that you give to secure a loan; the property itself is the collateral .

If you're trying to sort through the "lien vs. collateral" question, it's not really a question at all; they're related terms, but they're not the same thing, and they're not opposites. When you borrow money and give the lender a security interest in property, the property itself is the collateral, and the security interest is a lien.

What Is a Lien?

A lien is a right to your property that secures indebtedness. The person or entity to whom you owe money, called the creditor, has the right to take your property and sell it if you don't pay the creditor back. Liens can be both consensual and nonconsensual.

Consensual Liens Vs. Nonconsensual Liens

Consensual liens , which are liens that you give voluntarily so you can borrow money, are quite common. If you borrow money to buy a house or a car, the lender gets a lien on the house or the car. If you take out a business loan, the lender will likely require that you give it a lien on your business assets. You grant the lender a security interest in your property, and it means they have a lien. The lien secures the loan, so that if you don't pay, the lender can take the property. The property you pledge to secure a loan is called collateral.

Nonconsensual liens are liens that occur without your consent. These include judgment liens and mechanics' liens, as well as property tax liens and income tax liens. If you don't pay your debts, judgment creditors, contractors, local governments and the Internal Revenue Service can obtain a security interest in your property by following certain procedures. Like a consensual lien, a nonconsensual lien gives the creditor a right to satisfy your obligation through the property.

Security Interest Vs. Lien: Hand in Hand

The terms "security interest" and "lien" do have subtle differences, but generally, they are used interchangeably. A lien is a type of security interest, and a security interest creates a lien.

Liens are creatures of state law. The laws vary state to state as to how liens are created, perfected and enforced. However, most states follow the same basic rules, even if the procedures are different.

Enforcing a Lien

The purpose of a lien is to allow a creditor to get paid by taking and selling your property. If you default on your mortgage, the mortgage lender can foreclose on the mortgage and eventually sell the house at a sheriff sale. If you don't make your car payments, the lender can repossess the car. If you don't pay your business loans, the lender can take anything you've pledged as collateral and sell it at auction.

A lien is easily created. However, to enforce the lien against others, a creditor must take steps to perfect the lien. A creditor who has a perfected lien can enforce its lien against the property owner and against anyone else who might try to get a lien on the property.

Perfecting a Lien

Lien perfection is a very important part of enforcing a security interest. Perfection gives the world notice that the lien is there. Different types of liens are perfected in different ways.

For example, a lien on business assets is given by signing a security agreement, and the lender must then complete a document called a UCC-1 Financing Statement and record it with the state in which the business is located.

A lien on real estate is perfected when a mortgage document is signed by the property owner, and the document is recorded with the register of deeds where the property is located.

A lien on a motor vehicle in most states is perfected by a notation on the vehicle title.

Types of Liens

The most common types of liens are:

• Mortgages. A mortgage is the type of lien you give to secure a loan with real estate. Your home loan is secured by a mortgage; you can also secure a business loan with a mortgage on real estate.
• Vehicle liens. If you borrow money to buy a car, you give the lender a lien on the car. You can also put up your car as collateral for other loans, if you own the car free and clear. Business loans may be secured by work trucks, for example.
• Liens on business assets. Business loans are hard to get if you don't offer collateral. You can offer up any asset with value as collateral for a business loan, if the bank will accept it.
• Mechanics' liens. Mechanics' liens are liens that a contractor or subcontractor can get on your house or that an auto mechanic can get on your car if you don't pay them for the work they do. These liens are often statutory: the law of your state will provide details about how they can attach. In some states, they're automatic, while in others the contractor has to take steps to attach the lien.
• Property tax liens. Property tax liens arise when you don't pay your property taxes. They attach automatically to your house until paid. If you sell your house, the taxes must be paid before you can pass clear title.
• IRS liens. The IRS can file a tax lien in your state and get a lien on everything you own, including real estate. The IRS will often allow the sale of property without payment in full, because its lien will remain on everything else you own until the taxes are paid.
• Judgment liens. Judgment liens are created in many states when someone sues you and gets a judgment against you. In some states, judgment liens are automatic; in others, the creditor has to take certain actions to get an enforceable lien. In most states, judgment liens attach only to real estate , although in some states, like California, a creditor can attach a judgment lien to personal property.

Mortgages Are Liens on Real Estate

A mortgage is a very common type of lien. To give a consensual lien on real estate, you must execute a mortgage, and to perfect the mortgage, the lender must record the mortgage with the register of deeds for the county in which the real estate is located.

If you don't pay on your mortgage, the lender can initiate the steps to take the property from you and sell it by going through foreclosure.

Car Loans Require a Lien

Financing the purchase of a car will always require that you give the lender a lien on the car. The lender must note its lien on the car's title, and it will remain there until you pay the loan in full and the title is marked paid in full and satisfied. If you don't make your car payments, the lender can repossess the car and sell it, then sue you for the deficiency balance.

Liens for Business Loans

Business loans can be secured by all types of property. To secure a business loan, you must execute a note and security agreement, pledging collateral for the loan. If the collateral is personal property (property that is not real estate), the lender must file a UCC-1 Financing Statement with the state to perfect the interest. If the loan is secured by real estate, you'll need to execute a mortgage. If the loan is secured by a motor vehicle, there will be a notation on the title in addition to a UCC-1.

Lien Priority: Who Gets Paid First?

Often, a piece of collateral will have more than one lien. Real estate commonly has multiple liens: first and second mortgages, property tax liens, IRS liens and judgment liens can all attach to real estate. Business assets may be subject to multiple UCC-1 financing statements from multiple business loans.

If there are multiple liens on one property, the order of payment depends upon lien priority . Perfected liens have priority over unperfected liens, even if the unperfected lien was given first. If multiple perfected liens exist, priority depends upon the type of lien and when each lien was perfected.

With some exceptions (such as property taxes, which must be paid when real estate is sold), the general rule for lien priority in many states is first in time, first in right . Whoever perfects a lien first has first priority, and so on. This comes into play when assets are being sold.

Lien Priority and Real Estate

When it comes to real estate, if the property owner sells the property, all the liens must be paid before he can transfer clear title. If the property goes through foreclosure , however, any money obtained at the sheriff sale gets paid in accordance with lien priority , and some creditors might not get paid at all.

For example, if you buy a house by taking out a mortgage loan, you'll execute a mortgage, which the title company will record with the county, giving the lender a valid, perfected first mortgage. If you then take out a home equity line of credit to rehab your bathroom, you'll give that lender a mortgage, and once recorded, that mortgage goes behind the first. If you don't pay your income taxes and the IRS records a tax lien after the second mortgage is recorded, the tax lien goes behind that. If you get sued and a judgment lien is attached after the tax lien is recorded, the judgment lien goes behind the tax lien, and so on.

If the mortgage company then forecloses, the property taxes will get paid, and the rest will go to the first mortgage company to pay the balance plus the fees from the sheriff sale. The second mortgage, the IRS liens and the judgment liens will only get paid if there is anything leftover.

What if the Collateral Is Underwater?

Occasionally, the collateral for a loan or obligation will have a value that is less than the amount due on the loan. Formally, this means the lender is "undersecured," but in common parlance, you might say the loan is "underwater." If you have an underwater secured debt and the creditor sells the collateral, you still have to pay back whatever the collateral didn't cover.

For instance, if you owe $15,000 on your car when it's repossessed and the lender can only sell it for $10,000, you'll still owe the $5,000 difference. That difference is called the deficiency balance .

Any type of secured debt may lead to a deficiency balance if the collateral isn't worth enough to cover the loan. If a lender agrees to release the lien and allow you to sell the property so it can take what it can get, make sure you have an agreement about whether the lender will pursue the deficiency. If the deficiency isn't waived in writing, the lender might come after you later.

• Perfect (Ed Sheeran song) - Wikipedia
• Collateral (film) - Wikipedia
• NOLO: What is a Lien?
• NOLO: Types of Property Liens
• NOLO: What is Lien Priority?
• FindLaw: Understanding Mechanic's Liens
• California Secretary of State: Notice of Judgment Lien
• Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sept. 29, 2020.

Rebecca K. McDowell is an attorney focused on debts and finance. She has a B.A. in English and a J.D. She has written finance and tax articles for Zacks and eHow.

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