Understanding Perfected Liens: Types, Filing Processes, and Legal Implications

A perfected lien is a lien that has been filed with the appropriate filing agent in order to secure the creditor's interest in an asset. A lien is used in secured loans and integrated into the lending contract. Liens can also be involved in other special situations.

A perfected lien provides legal documentation to prove that a creditor has a legal right to seize property in place of payments for which they are owed. Procedures for perfecting a lien differ depending on state and federal guidelines. Accuracy in the perfection process is necessary to avoid procedural delays or legal challenges.

How Perfected Liens Work

There can be several types of liens and perfected liens. A perfected lien is a binding document that has been filed with the appropriate agency allowing for a legal claim to seize assets if a payor defaults. Commonly, a perfected lien is enacted for the purpose of legally securing collateral for a creditor in a secured loan.

How Perfected Liens Secure Loans

Secured loans require a lien since the loan is backed by a specified collateral asset. Secured loans can be offered against a range of collateral types, the most common being real estate used in mortgage loans. Other types of collateral loans include secured loans for commercial equipment, automobiles, art, or jewelry.

A secured loan typically involves both a lien and associated title rights to the collateral property. A creditor will create a lien to document their legal claim against secured collateral. The creditor is also usually the title owner on the collateral asset until the loan has been paid in full. A lien gives the creditor legal right to easily obtain permission from the courts to move forward with a levy, which involves notifying a borrower that assets are being prepared to be seized because of unpaid payments on a loan against the collateral. Liens help to provide a standardized process for lenders to obtain property that is being occupied or physically held by a borrower.

It is very important that a lender not only document their lien against collateral but also perfect it by legally filing it with the appropriate agencies and authorities. If a lien is not perfected, the lender’s claim on the assets may not be granted in a default situation. The process in moving forward with a levy can also be significantly delayed if a lien has not been appropriately perfected.

Borrowers can be released from the burden of a lien after certain requirements have been met. Some legal contracts may include a release clause, whereby the borrower is released from a lien against collateral at a certain threshold. Thresholds in release clauses can vary. A release clause could potentially release a borrower after a certain percentage of a loan has been paid or after a specified number of payments have been made consecutively. Parties involved in contracts with release clauses have the right to set their own parameters. Oftentimes, a lien will only be released after 100% of payments have been made. Once 100% of payments have been made the title on secured property will be transferred from the name of the lender to the borrower.

Understanding Different Types of Liens

In most cases, a lender will perfect a lien at the time of purchase and closing. In some situations, a lender may not take steps to perfect a lien until they feel they are at risk of not receiving their full payments. Different states and scenarios can have their own rules about liens and perfected lien filings. Broadly, there can be several types of liens.

Tax liens: Tax liens are usually considered to be statutory. This means that standard processes for lien documentation and perfected lien filings are not usually necessary. The federal and/or state government can notify you of a tax lien, which usually follows shortly thereafter with a levy.

Real estate liens: Real estate liens are documentation that a lender has the right to repossess real estate property if a borrower becomes delinquent. Real estate liens will usually need to be perfected in order for repossession activity to occur. The information regarding liens, perfected liens, and levy repossession is usually detailed in a mortgage loan contract.

Car liens: Car liens typically work similar to real estate liens. The lender will need to perfect the lien in order to take action in a levy repossession. If a car owner sells their car in order to pay a car loan they will need to payoff the lender first in order to get a clean title transferred to the new owner.

Judgement lien: A judgement lien can be enacted by the courts. A judge can rule that an individual or entity must pay a plaintiff a specified amount of money with a lien attached to certain assets. The ruling of a judgement lien usually takes the place of the perfection process.

How To File a Perfected Lien

In the legal industry, perfected is a term that refers to the process of officially filing a claim in order to make it legally binding. Perfected liens have various filing requirements based on the situation, type of collateral, and state or federal rules.

In a commercial lending transaction, a Form UCC-1 financing statement must usually be filed with the correct authority to perfect a lien and make it legally binding. In most states, liens are filed with the Office of the Secretary of State or the Office of the County Recorder.

A filing form and lien document outline the details of the situation and/or the assets used to secure a loan. A filing statement is usually provided as authorization that the lender or associated party is entitled to first-order rights to seize specified assets detailed by the lien after a delinquency threshold has been reached.

Understanding the Difference Between Lien and Levy

It can be important to understand the distinction between a lien vs. a levy when a lien has been documented and a perfected lien has been filed. A lien provides documentation that an associated party, usually a lender, has secured collateral repossession rights if a default occurs. In order for a lien to be enacted, the lender must usually move forward to obtain a levy for repossession. A levy gives a lender the actual right to take property. As such, liens, levies, and repossessions can be somewhat of a slow process because of the legalities involved.

The Bottom Line

A perfected lien is a lien that has been filed with the appropriate filing agent in order to make the securing interest in an asset binding. A lien, which provides documentation that a lender has secured the rights to repossess collateral in the case of a default, is different from a levy, which gives the lender the right to actually take possession of the collateral.

Secured loans with high-value collateral associated with the lending agreement will typically need to be perfected to avoid legal complications. There are different federal and state requirements dictating lien procedures, such as filing the Form UCC-1 financing statement for commercial liens.