Posted in Finance, Accounting and Economics Terms, Total Reads: 515
Definition: Non-Possessory Lien
When a creditor such as a bank or any financial institution provides credit to a person or a company, they might sometimes take a legal right over the debtor’s property such as land, machines etc. to cover for the debtor’s default/credit risk. In this case, the bank or the financial institution has only a legal right on the asset but does not possess it physically, then it is called as a non-possessory lien.
For example, a bank can hold a non-possessory lien against a piece of house of the debtor in the case of a mortgage loan as a kind of collateral and take back the loan money when the debtor fails to repay the amount according to the stipulations. Thus the home is not in the physical possession of the creditor but the creditor has a lien on it i.e., a legal right of ownership contingent to the fact that the debtor fails to repay his debt. This type of facility is included in the debt covenants guaranteeing the creditor a legal right on the asset used as collateral. This right over assets is protected by the law.
On the other hand, possessory lien refers to collateral that the pawn shops keep for giving credit to their customers. They do this by holding the asset/collateral physically with themselves. Thus if the customer does not pay back the credit that is taken, the pawn shop owner can sell off the collateral to cover his loss.