A voluntary lien is a legal claim that is initiated by the debtor as opposed to involuntary liens, which are usually imposed on the debtor without their consent. Voluntary lines are legal claims created by the debtor’s actions such as taking a mortgage or car loan where the house or car is attached as security (collateral). On the other hand, an involuntary lien is a claim that is imposed on the debtor usually by law, such as, a special assessment or property tax liens, and judgement liens, which are usually imposed by the government or the courts.
The existence of a lien on a property typically bars it from being sold or transferred to another party until the debt is settled. The lien should mirror the actual value of the property that is attached as security for the loan. In case the borrower defaults on their loan, the holder of the lien can exercise their security interest in the property to become its legal owner.
Scenarios Where Voluntary Liens Are Appropriate
The most common application of voluntary liens is when an individual acquires financing for large purchases such as through a mortgage to buy a home or by getting a car loan. In such cases, the tangible property acquired is used as security for the lien. However, there are other situations where a voluntary lien can be applied as security, which include credit agreements, personal loans secured by other types of collateral, business loans, and furniture and appliances acquired through the rent-to-own model.
Voluntary liens do not have to be secured by the property that was acquired by proceeds from the debt procured by the owner as is the case with car loans and mortgage. The scenarios outlined above allow debtors to attach other types of property that they own as security for liens created through debts that are not related to the collateral property.
For example, an entrepreneur can create a voluntary lien by applying for and receiving a business loan to be used on their business. In this case, the entrepreneur can choose to attach the title to a lot that he owns as security for the voluntary lien. This is a perfect example of the scope of the use of voluntary liens as security for debts not related to real property such as cars, homes and land.
Other instances where voluntary liens could be used include situations where a business owner gets a line of credit on their business, where the lien holder would get a security interest in the business. A lien could also be created on valuable items such as paintings, which could be used as security for personal loans such as cash advances taken by the owner.
