UCC Liens Against Your Business Can Hurt Your Credit; Here’s What You Need To Know About The Uniform Commercial Code

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UCC Liens Against Your Business Can Hurt Your Credit; Here’s What You Need To Know About The Uniform Commercial Code

by Richard Fonfrias,

J.D. Chicago’s Financial Rescue &

Bankruptcy Lawyer

Fonfrias Law Group, LLC

What is the Uniform Commercial Code (UCC)?

The UCC is a large body of rules that dictate how commercial matters are handled between buyers and sellers.  Each state enacts laws that govern areas that preempt uniform federal law.  Even so, many legal issues, such as sales and acquisitions, transcend state lines, which require a uniform set of laws.

The UCC is one of those uniform acts whose goal is to integrate the law of commercial transactions across the United States. 

 Definitions: UCC Filing & UCC Lien

In this article, I’ll discuss the UCC’s Article 1: General Provisions, which discusses UCC filings.

A UCC filing is a form filed by a creditor showing that a debtor has pledged personal or business property as security for a loan.  As a small business owner, you can improve your business credit by looking into your business’s UCC filings.  If you have reviewed your business’s credit report, you may have seen something called UCC filing.  Now you know what that term means.

A UCC lien means that the lender has the legal right to possess the borrower’s personal or business property until the debt is paid.  The lien protects the lender’s interest in case the debtor defaults or files bankruptcy.  In either case, the business assets would be seized or sold to pay the lender. 

 For Example

 Suppose you own a restaurant in Chicago and want to get financing to buy a new espresso machine.  Once you get the loan, your lender will file a UCC lien stating that if you don’t repay the debt, the lender can repossess the machine or seize other property owned by your business.  Until you pay off the loan, the espresso machine will serve as collateral and your credit report will show a UCC filing with details of the loan until you pay the debt in full.

Going on, suppose you want to get another loan to buy more equipment before you finish paying off your espresso machine.  When your new potential lenders perform a UCC search, they’ll see that your espresso machine has a lien on it and cannot be used as collateral for your new loan until the previous loan is paid in full.

UCC filings protect the lender’s security interest by giving notice to other potential lenders that it has the legal right to seize and sell certain assets to repay a debt.  This type of agreement might be required for a lender to loan money to your business.  Plus it sets forth the terms of the lien that the lender will have on your property in case you default or file bankruptcy.

How Does a Creditor Post a UCC Filing?

Once you are approved for a loan, the lender posts a UCC filing with your home-state business’s secretary of state.  This creates a lien against specific property — or all of your property — depending on the assets you have chosen to use as security. 

The UCC filing statement needs three pieces of information:  the debtor’s name and address; the creditor’s name and address; and a description of the specific collateral, reasonably described.  Since the notices of the UCC lien are public, they are often published in the legal newspaper of record.

 The UCC filing has a life of five years, and the lender must renew the filing if it wants to protect its interest in collateral for more than five years. 

What Assets Can Lenders Place a UCC Filing On?

Nearly anything.  The assets can include property, real estate, or any other business assets.  And if you don’t pay your debt, a creditor that gets a judgment against you can usually seize cash from your bank accounts or compel the sale of most business assets.

Even so, a judgment creditor cannot take personal property that is legally exempt from seizure.  This usually includes a certain amount of personal assets including furniture and clothing.  In addition, most states exempt a certain amount of equity in a vehicle, a certain amount of equity in a home, a few thousand dollars’ worth of business equipment and tools of your trade, and money in tax-deferred retirement plans.

The exact amount of exemptions vary from state to state, so it’s a good idea to check your state’s bankruptcy exemptions to know what rules will apply to your secured debt.

Why This is a Serious Matter for Your Business

 Even if you pay your bills on time, and in full – UCC filings can come back and bite you because of the 5-year active lien rule.

Here’s what could happen:  You might be finalizing a loan with another lender and at the last minute, your loan gets denied because of a public records search.  Why?  Because the search turned up a UCC lien that was still active.  How could that be?

You check and find out that the UCC lien on your credit report was for a loan you paid in full two years earlier. 

Two Cardinal Rules

 Rule #1:  Before you seek new financing, search for UCC filings to make sure that your business has no UCC filings that are still active for debts that you have already paid in full. 

Rule #2:  After you pay off a debt in full, immediately ask the lender to terminate the lien on your assets by filing a UCC-3 form.

Make sure you stay up to date on the UCC filings made against your business.  This will allow you to get the financing you need, when you need it.  To check on the UCC filings, get copies of your business credit reports or search UCC lien public records.

Call me today – 312-969-0730 – and I’ll explain how we get your account transcript so we can analyze it and see if we can discharge your tax bill in bankruptcy.