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What is an Encumbrance?

Mary McMahon
By
Updated May 16, 2024
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An encumbrance is some sort of restriction on property which can inhibit its transfer. Encumbrances can affect the title of property, or they may take the form of restrictions on funds. In both cases, the encumbrance restricts free use of the property or funds until the issue is resolved. Encumbrances take a number of forms.

One of the classic cases in which an encumbrance appears is in a real estate context. Some examples of encumbrances include liens on real estate, outstanding mortgages, easements, unpaid property taxes, or deed restrictions. All of these encumbrances are attached to the title of the real estate, and they can complicate or prohibit the transfer of the title until they are resolved. Encumbrances can also affect titles to other types of property, such as a car title.

In accounting, an encumbrance could be viewed as a type of funds hold. When an account has an encumbrance, it means that funds are being set aside to meet financial liability requirements. Although the funds are considered part of the account, they cannot be spent, because they are being held to discharge a bill. Once the bill is paid, the encumbrance is released and the funds are recorded as an expense. Colleges and universities may also use the term “encumbrance” to refer to a block on a student account which will not be lifted until the student gets current with payments.

Encumbrance accounting is used in a wide variety of settings. It can be confusing to people who are not familiar with it, because the status of funds may not be immediately clear. It can also be utilized to overinflate the contents of an account, by making it look like the account is filled with funds, when in fact the funds could be restricted and already designated for use elsewhere.

It is important to understand how an encumbrance will affect a transaction before committing to the transaction. For example, with real estate, people embarking on a short sale need to know that the bank has the final say in the purchase price of the property, because it holds a lien on the title and it will not release the lien unless it is satisfied. It is also important to research before making a purchase of an item which could be subject to an encumbrance, to confirm that there is no problem. For example, someone who buys a property with outstanding unpaid property taxes will inherit these expenses and the associated fees, and the tax agency could sell the property to recover them.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By Azuza — On May 04, 2012

I had no idea so many things could put an encumbrance on a piece of real estate. I've been thinking about buying a house sometime in the near future, so I'm glad I have this information.

I'm wondering if you can get some kind of ownership and encumbrance report on a piece of property? That way, you can find out if there's anything preventing you from buying it!

I guess I will have to ask a real estate agent about it when I get ready to start looking.

By ceilingcat — On May 03, 2012

@SZapper - That's an interesting way of looking at it. I know my bank takes three days before the funds from deposited checks are available. So the money is in your account, but you can't use it. To me, this kind of sounds like a temporary encumbrance!

Anyway, like another commenter, I know someone who had an encumbrance places on their account at school. Some mix-up happened with their student loans, and their bill wasn't paid on time. The school put a hold on their account and said they couldn't register for classes until the money came through.

Luckily, my friend was able to get that straightened out in the same semester so he didn't miss any school.

By SZapper — On May 02, 2012

@SarahSon - Wow, glad you guys were able to get that worked out. I feel like if a piece of property is for sale, is should be free from encumbrances. This isn't something I would have ever thought to check, but if I ever buy property I will after hearing your story.

Anyway, when the article was talking about encumbrances in accounting, it almost made me think of pending charges in ones bank account. You know, when you use your debit card, and the charges are pending before the money is taken from your account?

You would think this would put an encumbrance on your account, but with most banks it usually doesn't. So you can spend the money twice, then get hit with an overdraft charge!

By andee — On May 01, 2012

I know what an encumbrance is because I ran in to this when I bought a used car from someone. The kid I bought this from was not current on the registration for this car.

They would not transfer the title until these fees were paid. He had let this go for a few months, so in addition to the registration fees, there were also penalties that were due.

This was the first time I had run in to something like this, and would have backed out of the deal if he had not come up with the money to pay for this.

This made me pretty apprehensive about buying the car and I wondered if I was making a mistake. I have a mechanic friend who looked it over pretty good, and it turned out to be a good car.

By bagley79 — On May 01, 2012

My son had an encumbrance put on his account at the community college where he was taking classes.

There was a big mix up with his student loan money and he was not awarded the money he thought he was going to be receiving.

Because he was going to school and not working full time, he had a hard time making the payments on his account. There was a block put on his account, and he couldn't enroll in any more classes until he got caught up.

He had to wait until the student loans for the next term came in before he could continue on with his classes. It was very frustrating for him, but it was at the point where it was out of his control and all he could do was wait.

By SarahSon — On Apr 30, 2012

When we bought our land in the country, we were unaware the previous owner had not paid the property taxes.

He lived in another state, and this property had been vacant for many years. We still don't know how this was missed when we went through with the closing.

We had lived there for a few months when we were served papers saying our taxes had not been paid and our land was going to be sold at a tax sale.

We immediately called our attorney to figure out what was going on. Thankfully we were able to get everything straightened out without too much trouble.

Since then, we have always made sure whatever we purchase is free of encumbrances. If this encumbrance had been brought to our attention earlier, we would have known about it before we even went through with the purchase of the land.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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