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Unencumbered Definition – What is an Unencumbered Asset?

What Is Unencumbered?

Unencumbered Unencumbered is used to describe an asset or property that is free and clear of creditor claims, judgments, liens. mortgages, or obligations.

If a person is unencumbered, they are free of baggage.  As a result, they don’t have anything to carry or they are emotionally carefree. Similarly, an unencumbered asset is free of any excess baggage.  There are no outstanding liens, claims, or financial obligations.

Examples of unencumbered assets include houses free of mortgages or other liens, cars with paid-off loans, and stocks purchased in a cash account. When a property is unencumbered, there are no liens or claims from creditors to impact the value or the owner’s right to sell it. As a result, unencumbered assets are easier to sell or transfer than encumbered assets.  Unencumbered assets can be any sort of personal property.  However, the term commonly refers to real estate. A title search will usually be performed before you close on a home.  This guarantees that the property is unencumbered and free to transfer to you, the new owner.

Unencumbered Assets

Creditors have no claims on unencumbered assets because no obligations are associated with them. As a result, these assets are fully owned by the person listed as the owner on an official title or deed. To be considered unencumbered, the asset is not currently being used as collateral for any debt.  As a result, the asset is not vulnerable to competing claims, such as delinquent property taxes. High-value assets, like real estate and automobiles, tend to be encumbered with outstanding loans.  They are unlikely to remain unencumbered for the majority of customers, particularly young couples and new graduates. Expensive transactions are frequently financed, resulting in a debt obligation and the asset serving as collateral. However, as the mortgage or auto loan is paid off, these assets can become free of debt. A title search is an important aspect of the due diligence process for a buyer of real estate.

An unencumbered asset is one that is free of any underlying judgments, liens, or other obligations. It is free and clear, and it is a relatively simple process to transfer to a new owner. However, if a property is encumbered, it signifies that another person or group has an underlying claim on it. Liens, court judgments, or unpaid taxes are all examples of encumbrances. So an unencumbered property is one that is free of all underlying claims.

Unencumbered real estate

If an asset is unencumbered, it is free and clear of any government or financial institution liens or claims. The owner indicated on the title is the single owner, and the asset is easily transferable to a new owner. For example, if a homeowner pays off their mortgage completely, they own the house outright. They will have no trouble selling it to a new homeowner.

As an example, suppose you wish to buy a house. If there was an undetected tax lien on the property, it would be impossible to buy until the debt was cleared with the federal, state, or local government. If the encumbrance goes undiscovered, you, as the new owner, will be liable for the debt and may lose the property.  To protect you when buying a new home, your mortgage lender will have a title company run a title search on the property. It will do this to ensure the property is unencumbered and free from any outstanding loans, leans, or judgments.

Unencumbered real estate is easier to transfer.  This is because only the property seller and the potential buyer are involved to approve the sale. Furthermore, there will be no fixed needed sale price.  The seller will be free to establish the price at his or her discretion without an existing loan amount to satisfy.

Unencumbered automobiles and vehicles

Another example of an unencumbered asset is a vehicle. When a person buys a car, they may finance it with an auto loan.  Eventually, they can pay it off and own the car outright. However, if the owner fails to make loan payments, they risk losing the car.  The lending firm may seize the vehicle as collateral. When buying a used automobile, always ensure that the title is free and clear.  It is always prudent to ask the seller or financing company to run a title search.

Encumbered Assets

An encumbered asset is one that has underlying claims against it. This can take a variety of forms, ranging from mechanic’s liens to court judgments. Before the owner can sell the property, the encumbrance must be removed. Encumbrances can present serious issues in real estate transactions.  This is why a title check is essential before closing on a home.

Encumbered assets can be sold.  However, the sale process requires the approval of additional parties.  Not only the buyer and seller but any other entity that has a claim to the asset.  For example, the bank issuing the loan for the collateralized asset. This can lead to minimum sales price requirements.  Often, an amount equal to or above the collateralized debt amount against the subject property. This ensures the debt will be effectively paid off as part of the sales transaction.

Unencumbered vs Encumbered Assets in Bankruptcy

The first claim to encumbered assets typically goes to the party holding rights to the encumbrance.  In most bankruptcy proceedings involving liquidations, the institution holding the encumbrance has the first chance to recoup some of the losses.  They can do this through the acquisition, and possibly the later sale, of the assets in question.

In most bankruptcy proceedings involving liquidations, encumbered assets are first considered the property of those holding rights to the property through the encumbrance, allowing the institution to recoup some of the losses through the acquisition, and a possible later sale, of the assets in question. In some cases, unencumbered assets do not have a predetermined owner if the assets are liquidated in bankruptcy. This allows the value of any liquidated unencumbered assets to be distributed to creditors who extended unsecured credit. In certain circumstances, the IRS, state, or even local taxing authorities can place a lien on the previously unencumbered property to collect past due taxes. (Source: investopedia.com)

Up Next: What is a Banking Relationship vs Relationship Banking?

Banking RelationshipYou need to have a banking relationship, especially if you’re an entrepreneur or business owner.  Having a good bank is key to running a successful business. From getting a loan or line of credit to getting help with invoices and tax season, it’s important to be on good terms with your bank. When it comes to business and banking, being on good terms is more than just your credit score.

Relationship banking is a strategy used by banks to strengthen customer loyalty and provide a single point of service for a range of different products and services. A customer of a bank may start out with a simple checking or savings account, but relationship banking involves a personal or business banker offering products designed to help customers attain financial goals while increasing revenue for the financial institution.

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