UCC Filings: What You Need to Know
If your business provides credit to customers, it’s important that you know about UCC filings. Let’s start at the beginning.
What Is the UCC?
The Uniform Commercial Code (UCC) was established in 1952 as a way to uniformly govern sales and other commercial transactions across the U.S. The code specifically addresses the following areas:
- Negotiable Instruments
- Bank Deposits and Collections
- Funds Transfers
- Letters of Credit
- Bulk Transfers and Sales
- Documents of Title
- Investment Securities
- Secured Transactions
What Is a UCC Filing?
A UCC filing (also called a UCC-1 or UCC-1 Financing Statement) pertains to the last area listed above: Secured Transactions. It is a public notice of a security interest in a particular asset of a particular debtor. This financing statement protects the lender’s interests in the event the debtor defaults or files for bankruptcy. Should that occur, the lender may seize and/or sell the secured property.
A UCC-1 is filed with the office of the Secretary of State in the state where the debtor resides or where the debtor business is incorporated. (Forms are available online through the individual Secretary of State offices.) Because it is filed with the Secretary of State’s office, a UCC-1 is considered legally binding.
The UCC-1 is a relatively simple form, containing only three pieces of information:
- The Debtor’s name and address
- The Creditor’s name and address
- A description of the secured property
Once filed, the UCC-1 remains active for five years, after which it must be renewed.
Conducting a UCC Search
Before you extend credit to a customer, you’ll want to determine if any UCC liens have been placed on the secured property. You can do this by conducting a UCC search through the Secretary of State website in the state where the debtor resides or the debtor business is incorporated.
It’s essential that you enter the debtor’s correct legal name when conducting the search. But you also want to include any former names that may have been used, as there could be active UCC filings listed under former names.
If you find that the debtor’s security already has one or more UCC liens filed against it, you will need to decide if you are willing to risk extending credit to that customer. The lender with the oldest UCC-1 filing has the highest priority claim to the secured property. This is why many high-profile lenders will not file a UCC lien after that of another lender.
Why File a UCC-1?
The vast majority of people and businesses to whom you extend credit fully intend to repay you. But sometimes things happen which they may not foresee. If your debtor is unable to pay the debt, you could lose all or part of the secured collateral if you’re not protected.
Filing a UCC-1 provides that protection by establishing you as a secured party. So in the event the debtor goes bankrupt or otherwise defaults, you have a “place in line” when the debtor’s collateral is divided among all the parties.
Secured creditors are positioned at the front of the line (behind the IRS and other government entities.) So your chances of recovering at least a portion of your money are much higher. On the other hand, if you have not filed a UCC-1, you’re considered an unsecured creditor, sending you to the back of the line in the event of a default.
How to File a UCC-1
The UCC-1 should be filed with the Secretary of State’s office in the state where the debtor resides (if an individual) or is incorporated/organized (if a business). If the collateral is real property, it’s wise to also file the UCC-1 with the recorder’s office in the county where the property is located.
As mentioned above, virtually all secretaries of state maintain websites where you can file a UCC-1. Typically, these sites also provide the UCC-1 Financing Statement form for you to download and complete, as well as detailed instructions.
There is also a national UCC-1 form available to download. However, the state in which you wish to file may require that you use their particular form. So, it’s best to always use the state form whenever possible. When completing the form, be sure to follow all instructions and pay careful attention to use the debtor’s correct legal name and full address.