A possessory lien is a type of interest that grants possessory rights to the creditor until the borrower has satisfied their obligation. A lien generally lasts until the debtor pays off the debt or the obligation that secures the debt is satisfied. A lien does not amount to full legal ownership; however, a lien may restrict the unrestrained use of the possession. The restriction, an encumbrance, is lifted either when the creditor removes the restriction or the debt has been fully paid. A lien is not attached to the creditor but to the property.
A possessory lien allows the lender to remain rightfully in possession of the property under the lien. The interest serves to secure the payment of the debt or the performance of the obligation to the creditor. The value of a lien depends upon the value of the possession in question. The seizure and foreclosure sales of a possession due to the unfulfilled obligation to the lien will generally result in the sale of the possession at a significantly below market value of the possession. Typically, the power to sell the possession is not attached to the right of possession to the creditor under the possessory lien. The lien holder may want to make sure that the collateral stays intact.
When a good is purchased on credit or through a loan, a possessory lien occurs. The creditor who grants the possessory lien owns a legal claim on the good until the debt or the obligation is satisfied. The prime examples of possessory liens are home mortgages, pledges of chattels, vendor’s liens, garageman's liens, and the liens of innkeepers. A possessory lien does not include any agricultural or security interest liens. Similar to other types of liens, the debtor gains possession of the goods prior to the satisfaction of the debt. Also, if the creditor discharges the debt or the obligation, the lien is removed from the debtor. Along with the removed lien, the debtor gains full legal possession.
The laws for liens and possessory liens differ drastically from jurisdiction to jurisdiction. A debtor must ensure that they pay off the debt in due time because the failure to do so may result in the loss of ownership. Depending on the jurisdiction, a failed payment may result in a partial loss of ownership of the possession, subject to the unpaid amount.
See also: Uniform Commercial Code § 9-333. Priority of Certain Liens Arising by Operation of Law, pledge, Younger v. Plunkett, 395 F. Supp. 702 (E.D. Pa. 1975), Nat'l Bank of Joliet v. Bergeron Cadillac, Inc., 66 Ill. 2d 140 (1977).
[Last updated in January of 2024 by the Wex Definitions Team]
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