When I was a kid, my parents used to take away my Walkman until I did all of my chores.
Now that I’m an adult, I know that the stakes for evading responsibilities are much higher, like I could get evicted if I don’t pay my rent.
You may be wondering what this has to do with UCC filings. And just like my parents taking away my Walkman if I didn’t hold up my end of the bargain, when you don’t pay your portion of a loan, the bank can repossess something of yours that you love.
Beyond my nostalgic analogy, UCC filings can be complicated, so we’re here to break down everything you need to know.
What is a UCC filing?
A UCC filing is a legal notice that a lender files with the secretary of state when they have a security interest against your assets, such as personal or business property. They allow a lender to formally lay claim to collateral that a debtor provides to secure their financing.
How do I get rid of a UCC filing?
Pay off the debt
File a UCC-3 Financing Statement Amendment
Swear an oath of full payment at the secretary of state office
There’s a lot that goes into a UCC filing, including how they can affect your business credit, so let’s get started.
What is the Uniform Commercial Code (UCC)?
The Uniform Commercial Code (UCC) was formed in 1952 to govern the sales and leases of products and goods. As the economy in the US grew, so did the need to regulate business transactions. The UCC was then created to standardize the process of various business transactions in multiple states by forming consistency.
The Uniform Commercial Code consists of 11 articles, each pertaining to a certain form of commercial transaction:
General provisions (contains generic interpretation language)
Sales (refers to the sale of goods or services)
Leases (refers to the leasing of goods)
Negotiable instruments (refers to commercial paper and promissory notes)
Bank deposits and collections (refers to banking and collections)
Funds transfers (refers to bank transfers)
Letters of credit (refers to letters of credit)
Bulk transfers/bulk sales (refers to asset liquidation)
Documents of title (refers to bailment of goods)
Investment securities (refers to securities and financial instruments)
Secured transactions (refers to the legal interests of creditors in secured transactions)
Essentially, the UCC is a long list of laws, but the one we’ll be breaking down in this article is Article 1: General provisions, which consists of UCC-1 filings, which are more commonly called UCC filings.
A UCC-1 Financing Statement refers to the legal document that a creditor will file to give notice of interest in the personal or business property of a debtor. This gives the creditor the right to keep possession of the property belonging to another person until the debt owed is discharged.
Example of UCC filings
Now that we’ve explained what a UCC filing is, let’s further break it down with an example.
Let’s say you own a boutique of vintage clothing in downtown Chicago and take out a loan to buy a state-of-the-art credit card scanner to help decrease the chances of a data breach. When equipment financing is secured, the lender will file a UCC to the state that if the debt for the credit card scanner is not repaid, the lender has the right to repossess it or other assets from your business.
While you’re paying off your equipment financing loan, let’s say you’re interested in buying a security camera. When you apply for financing, you won’t be able to offer up your new credit card scanner as collateral for the purchase because any lender you apply to will perform an Illinois UCC search and see that your equipment financing lender already has a claim on it.
Tip: To conduct a UCC filing search, just visit the website for the National Association of Secretaries of State and find your Secretary of State. Then, you can either search for the financial statement number or your name.
This information is public record so it can be known that there is a right to take possession of, or sell, certain assets for repayment of a specific debt.
How are UCC filings performed?
Once you’re approved for secured financing, the lender will file the UCC-1 Financing Statement with the secretary of state in your home state. This filing needs to contain three pieces of information:
The debtor’s name and address
The lender’s name and address
An indication of the collateral
Once it’s filed, it’s public record and can sometimes even be published in the local newspapers. The filing stays active for five years, and a lender needs to renew the file to keep the interests protected if they wish to extend it past those five years.
What can a UCC filing be placed on?
The most common assets within UCC filings are property, real estate, or any other business assets. Lenders can file a UCC lien on assets that also include:
Large operating equipment
Commercial instruments, such as drafts or promissory notes
Letters of credit
Other goods used or owned by the business
No matter the asset, if you fail to pay the debt, a judgment creditor can usually also take cash from your bank account, or even force the sale of other business assets.
There are exceptions to what can be taken, as most states exempt personal items such as food, furniture, or clothing.
How a UCC filing affects your business
Unsure how a UCC filing will affect your business? I’m sure by now you understand that not paying your debts will result in your assets being seized. But what happens if you do pay your bills all back? Unfortunately, the UCC filing can still come back to bite you.
Even when your debt is completely paid, some lenders won’t terminate the filing automatically. Because of this, you could be right in the middle of a financial agreement with a different lender, and receive a delay because a previous UCC filing is still technically active.
To make sure this doesn’t happen, you need to constantly monitor your business credit profile and see if there are any UCC filings on your debt, whether they’re active or not. To do this, simply check your business credit history and make a note of the filing records through UCC filing searches that are public record.
Mara is a Content Marketing Manager at G2. In her spare time, she's either at the gym, enjoying the great outdoors with her rescue dog Zeke, or right in the middle of a Netflix binge. Obsessions include the Chicago Cubs, Harry Potter, and all of the Italian food imaginable. (she/her/hers)