What Is Unencumbered?
If an asset or property is not encumbered, it means that it is free from any other obligation. There are no liens or claims from creditors that can affect the property's value and the owner's right to sell it when unencumbered.
A lien-free asset can refer to any type of personal property, but the term is commonly used in relation to real estate. Before closing a home, a title search will be conducted to ensure that the property is free and can be transferred to you, the new owner.
Definition and examples of Unencumbered
An unencumbered asset is free from lawsuits, liens, or any other underlying obligation. It is free and clear and can be easily transferred to a new owner.
If a property is encumbered, it means that another person or organization has an underlying claim on the property. This lien can take the form of unpaid liens, court judgments, or taxes. Therefore, a free-of-charge property is one that is free from any of these other underlying claims.
If you are buying a new home, the mortgage lender will ask a bond broker to search for the property's title. He will do this to make sure the property is clear and free to be purchased by you, the new owner.
For example, let's say you want to buy a house. If there was an undiscovered tax lien on the home, you wouldn't be free to buy until the debt was paid to the federal, state, or local government.
If the load goes unnoticed, you, as the new owner, will be liable for the debt and risk losing the property.
Your mortgage lender must work with a title company to conduct a title search, but it doesn't hurt to ask during the home buying process to make sure the property is free.
How a free of charge asset works
If an asset is not encumbered, it means that it is free and exempt from liens or claims from the government or financial institutions. The owner listed on the title is the sole owner and the asset can easily be sold or transferred to a new owner. For example, if a homeowner pays the mortgage in full, they own the home for free and without collateral. They can easily sell it to a new owner.
A vehicle is another good example of an asset that can be clear of obstacles. When someone buys a car, they can finance it with a loan to buy a car, and eventually pay it off in full and get the car for free. If the owner defaults on the loan, he runs the risk of losing the car; the lender may confiscate it as collateral. If you're buying a used car, you probably won't have a problem, but it doesn't hurt to ask the seller or finance company to do a title search.
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If a property or asset is not encumbered, it means that there are no liens, judgments or claims against it. Once the current owner is in full possession of the property or asset, it can be easily sold or transferred to a new owner.
A collateral is an asset with underlying claims against it. This can take many different forms, from mechanical liens to legal judgments. The lien must be settled before the owner can sell the property. The drawbacks are often real problems in real estate transactions, which is why a title search is needed before closing a home.
|Unencumbered Asset||Encumbered Asset|
|No underlying liens, judgments, or claims on the property||There is an underlying claim on the property like a lien or legal judgment|
|The current owner is in full control of the property||The current owner is not in full possession of the property|
|The property can easily be sold or transferred to a new owner||Any encumbrances must be removed before the property can be sold|
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