Definition: An unencumbered property is one that does not have any legal claim against it and is therefore free to be transferred to a new third party, or mortgaged. An unencumbered asset has an advantage over an encumbered asset, because there is no law that prevents the owner from using it for his own purposes or sell it to another party. However, an unencumbered asset is vulnerable to encumbrances and can be subject to a number of different kinds of claims and losses.
If a person acquires an unencumbered asset, such as a car, and uses it for his own purposes, without having a legal ownership claim to it, he may be held liable for certain losses, penalties, and even taxes on that asset, depending on the law of the jurisdiction where he acquired the asset. An unencumbered asset may be subject to various types of claims, depending on the laws of the country in which it was acquired. For example, if a person acquires an unencumbered asset in a foreign country and then uses it in Canada, he may be subjected to taxes on the possession of the asset and on the purchase price, even if he does not have Canadian citizenship or permanent residency.
If an unencumbered asset is used for the purpose of making a profit, then the person who benefits from the sale must have a right of ownership or control of the asset. The individual who is benefited must be given a legal title to the asset before it can be transferred, sold, mortgaged, or pledged. Otherwise, he would have acquired an encumbered asset and would have no legal right of ownership or control of it. As long as the transferor makes sure to pay any tax and other liens on the asset, the transfer is considered legally entitled to its use.
An unencumbered asset may also be subject to a claim, usually based on the amount of ownership interest in the asset has. If the claim is valid, the property will then be placed under the administration of an auctioneer, who is responsible for selling it in order to recover the funds the owner owes.
Another possible problem faced by an unencumbered asset is the loss or damage it may suffer when it is stolen. If the asset is sold at auction and the proceeds are not sufficient to pay for the losses and damages caused by the theft, the owner is left with very little property as a result. The assets may even be required to be seized and turned over to the government. In this case, the owner may not be able to reclaim his property because he has no personal rights to it.
Sometimes the asset becomes an encumbrance asset because the person who holds it becomes unable to make the payments on it. The owner may be unable to pay back the loan that secured by his asset, which could be a mortgage or a lien on the asset. If the situation continues, the asset could be subjected to a claim, which requires that the asset be sold and the proceeds used to pay off the debt.
An unencumbered asset is usually considered less risky than an encumbered asset. In a land-based asset, a third-party who buys the asset without the legal obligation to pay back the loan secured by the asset usually receives full title and possession of the land. If the asset is a car, it may be transferred into the hands of a trust, which holds the title to it and has the right to collect the interest on the asset, although it has no rights to the vehicle itself.
An unencumbered asset may also include any asset owned by a trust, regardless of whether the trust is also known as a deeded trust or an irrevocable trust. Because unencumbered assets are less risky than encumbered assets, unsecured property often comes at a lower price. The best way to buy an unencumbered asset is to purchase it from a person who is willing to purchase it for less, and use the proceeds from the sale to repay any outstanding debts.