I have written several articles over the past few years about the importance of obtaining the paper documentation and paying off obligations to avoid future problems when you want to sell an asset that you originally financed when you purchased it. This can be anything from a vehicle or a boat to a more significant asset like real estate or even a business and business assets like machinery and equipment.
The problem arises when you pay off an obligation in full; the party to whom you owed the money is oftentimes required to release or record a document evidencing their receipt of payment in full so their lien against the asset as collateral is released.
Although most often it is the seller or lienholder of the asset that is required to provide a release or termination of their security in the asset as collateral, more often than not this does not happen. I have repeatedly encountered situations where clients have paid off mortgages on real estate and, based on the fluctuation and fluidness of banks acquiring other banks, there were many instances where the lender or banking institution that is paid off is not the original institution with whom the loan was placed. This can lead to the bank receiving the final payoff without ever having the proper documentation in place, and subsequently never following through to record a termination or release of mortgage on the real estate. This does not become identified as a problem until you go to actually sell the real estate, at which time a title company doing a search while preparing a title commitment finds a mortgage recorded against the property with no proof that it has been paid in full. Many times I’ve spent several hours, and clients have incurred several thousands of dollars in legal fees, for me to hunt down the responsible party to record a termination in a lien for a debt that was paid years before.
In addition, I have also had similar situations occur for business clients who purchase machinery or equipment and for which a UCC-1 Financing Statement is filed with the Secretary of State’s office after payment of the obligation in full, only to discover that there was no follow-through to provide release of the lien or proof of payment in full.
In my practice, we are very careful to document all outstanding liens, private promissory notes between family members or business partners, and any other type of lien documents to make sure that when payments are made in full, those documents are properly processed and that people receive the original documents that they are entitled to ensure that the future proof of payment of obligations in full is easily achieved.
It may seem like a simple concept, but some of my clients have spent way too much money proving that they’ve paid an obligation in full when all they had to do initially was obtain the proper documentation when the payoff was made. So a word of advice: “Clean up those liens.”