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What is Unencumbered? Definition and Examples

Last updated 03/08/2024 by

Vlad Falin

Edited by

Fact checked by

Unencumbered assets, like cars and real estate, have no legal or financial claims against them. In other words, no creditor can repossess or seize the asset, and they may not have a claim to it during bankruptcy. Unencumbered items are often most attractive to potential buyers, as they’re easier to sell or transfer.
When you buy assets like vehicles or real estate, it’s important to know who you’re doing business with. However, the seller isn’t always the only one with a claim to the home, vehicle, or other items in question.
Many vehicles and houses are burdened with an encumbrance, such as an auto loan, home loan, or even a tax lien. While the seller is technically the owner, they still have an obligation to their creditors. It’s common for encumbered assets to come with strings attached, such as requiring creditor approval before a sale.
That’s why many individuals prefer to buy unencumbered property. Even if you’re financing the purchase yourself, it’s nice to know that you’re the only one who owes money on your property.

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What does “unencumbered” mean?

“Unencumbered” means that a property or asset is free and clear, which indicates that the owner has paid off any loans on the asset in question. That means the item has no tax debts, liens, judgments, or other obligations against it. As such a bank, creditor, or tax authority can’t claim it, influence its value, or prevent the owner from using or selling it.
Unencumbered assets may also include full paid-off cars or homes, as well as investments purchased in a cash account.

Understanding unencumbered assets

An unencumbered asset is free and clear from any and all financial and legal claims. For instance, they aren’t listed as collateral for debts and aren’t subject to past-due tax claims. That means the owner listed on the title (or account) is the sole owner. As a result, they have singular discretion to use or sell their property without outside influence.
That’s not to say that you can’t sell assets with claims against them — often, you can. Any relevant creditors may set specific restrictions. Even if they don’t, the owner and buyer still have to get the claimant’s permission before completing the sale.
In today’s topsy-turvy market, it’s rarer for consumers to purchase high-value items without an encumbrance. Many big purchases are financed, meaning a person must take on debt using the purchased item as collateral. For instance, about 63% of homeowners have a home loan with an average mortgage of $208,185 in 2020. Once these homeowners repay their debt in full, the properties will be considered unencumbered.

Encumbrances vs. liens

It’s not uncommon to hear “encumbrance” and “lien” used interchangeably, but technically they’re not the same thing.
  • Encumbrance. Encumbered assets are those that have one or more obligations against them. Such claims can burden or limit their use or sale, depending on the situation.
  • Lien. By contrast, a lien is a monetary claim on a piece of property established by someone other than the property owner.
Think about it this way: all liens are encumbrances, but not all encumbrances are liens.

What is the difference between encumbered and unencumbered?

Since unencumbered means the asset is free of any financial obligations, you can probably assume what encumbered means. Encumbered assets are those that do have at least one claim against them. In other words, an entity other than the property owner has an interest in the property.
With this in mind, it’s easy to see why people prefer to buy unencumbered assets. Generally, unencumbered assets are easier to sell or transfer because only the property owner can dictate the terms of sale. You can sell items with encumbrances, but your sale may be subject to third-party approval from the relevant claimants or creditors. Additionally, the outside party may set a minimum sale price requirement to ensure they receive their payment during the sales transaction.
Example: Say that you want to buy a house, but you don’t run a title search. Unfortunately, you find out after the deed transfers that home has a tax lien on it. Now that you own the property, you don’t just have to pay your home loan, but the tax debt as well. As such, your property now carries two encumbrances.
But if you run a title search before buying the property, you’re more likely to discover the encumbrance. When you do, you have a chance to cancel the sale. You can also request that the owner pays off the debt or lowers the price of the house before the sale goes through.

What is an unencumbered mortgage?

A house is unencumbered if it is owned outright with no loan, lien, or tax claims on it. However, some homeowners want to put a new mortgage on a house that’s currently unencumbered. Doing so allows them to tap their equity for cash to cover various expenses, which allows them to take out an unencumbered mortgage.

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Can I remortgage my unencumbered property?

Technically speaking, “remortgaging” refers to replacing an existing mortgage with a new one. If your property doesn’t have a loan against it, a true “remortgage” isn’t possible. But with an unencumbered mortgage, you can place a regular loan on a home that’s “free and clear.”

How to ensure you’re buying an unencumbered property

Most people find it preferable to purchase unencumbered properties or protect themselves in the event of encumbrances. Even if you unknowingly purchase encumbered property, you’re still often responsible for any legal or financial claims.
One way to ensure that an asset is free and clear is to run a title search, which checks for outstanding loans and liens. When buying a house or vehicle, this is often a key component of due diligence.
Generally, your lender should hire a company to run the search for you. As a condition of the sale, you can also request that the seller includes a search. Alternatively, you can do it yourself. If you find out the property has encumbrances while the sale is still pending, you can back out or renegotiate terms.
Another way to protect yourself is to get a warranty deed. This document essentially guarantees that the property is legally owned and unencumbered. If you discover that’s not true, the seller assumes full responsibility for any ensuing claims.

Unencumbered assets in bankruptcy

Encumbrances are particularly important during bankruptcy proceedings involving liquidations. In such cases, courts consider assets with encumbrances as belonging to the creditors and claimants who own the lien or judgment. (In other words, creditors with a claim to the property get first dibs.) This allows lenders to recoup their losses if the owner defaults.
It’s also possible for an unencumbered asset to receive a new claim against it. For instance, bankruptcy may order the sale of unencumbered assets to cover unsecured debts owed by the filer. In certain cases, federal, state, and local tax authorities may place a lien on the unencumbered property to force the collection of past-due taxes.

Key Takeaways

  • Unencumbered assets don’t carry liens, judgments, or claims against them by creditors, financial institutions, or the government.
  • By contrast, encumbered assets do have judgments, liens, or claims against them.
  • Unfortunately, even if you unknowingly buy an encumbered asset, you’re typically responsible for covering the obligation.
  • Before buying vehicles or real estate, it’s wise to run a title search to ensure that the asset is truly unencumbered.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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