What Is a Blanket Lien?
A blanket lien is a lien that gives the right to seize, in the event of nonpayment, all types of assets serving as collateral owned by a debtor. A blanket lien, theoretically, gives a creditor a legal interest in all of the debtor's assets. Blanket liens provide maximum protection to lenders, but minimum protection to borrowers. Borrowers can potentially lose all of their assets if they default on a debt subject to a blanket lien.
Blanket Liens Explained
The Uniform Commercial Code (UCC) regulates the concept of liens for businesses. In particular, UCC Article 9 provides definitions and key language with respect to the application and treatment of liens. However, the concept of blanket liens or "all assets" liens, has undergone legal challenges in recent years due to some perceived ambiguity in UCC Article 9. It would seem that UCC 9-108, with its requirement that collateral is "reasonably" identified, rejects "all assets" in an enforceable debt agreement, but cases have been brought to court anyway by creditors seeking claims on all assets of delinquent borrowers.
While it may not be clear-cut how blanket liens are defined in the private sector, there is no question that the Internal Revenue Service (IRS) reserves that right to apply an "all assets" lien when individuals do not pay their taxes. A federal tax lien "attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien," warns the IRS on its website.
Good Lien Agreement Practices
Both creditor and borrower have no interest in spending time and money in court arguing over what is and what is not collateral in the event of default. This is the reason that attorneys recommend that lien agreements contain as many specific details as possible on assets that are to be collateralized. UCC Article 9 serves as a guide for the drafting of lien language, but to avoid confusion between the parties and provide clear details in the UCC-1, the financing filing submitted to a Secretary of State for public posting, it is a good practice to individually describe the assets subject to lien.