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 serving as collateral.
Blanket liens provide maximum protection to lenders, but minimum protection to borrowers. Borrowers can potentially lose all of their pledged assets if they default on debt subject to a blanket lien.
- A blanket lien gives the right to a lender to seize all pledged assets owned by a debtor in the event of a default.
- Blanket liens provide maximum protection to lenders but minimum protection to borrowers.
- The Uniform Commercial Code (UCC) regulates blanket liens, particularly through UCC Article 9.
- UCC-1, under the UCC, is a public statement that declares a lender's right to seize a borrower's assets if they default. It stipulates what assets can be seized and in what order.
- When related to taxes, the Internal Revenue Service (IRS) has a blanket lien on all assets of an individual or business for unpaid taxes.
Understanding a Blanket Lien
Borrowing money and therefore taking on debt can be a good strategy for a business or individual, if managed correctly, and if it is the right type of debt. Financing can allow for a business to grow and expand where otherwise it might be difficult to do so. It can also improve a business's cash flow by providing the ability to pay down high-interest debt.
When providing a loan, a bank or lending institution may require collateral. Collateral reduces the risk to the lender in the event that the borrower can no longer meet their debt obligations. In this case, the lender can legally seize the asset pledged as collateral, sell it, and use the proceeds to pay off the debt.
Collateral is often required for risky borrowers with poor creditworthiness but can also be used for loans related to risky projects. Oftentimes posting collateral reduces the interest charged on a loan, and therefore may be in the interest of a borrower to pledge collateral.
When a borrower is particularly risky, a lender may require a blanket lien, where more than one asset is pledged as collateral, increasing the comfort for a lender and the ability to pay down the debt in case of nonpayment.
Regulation of Blanket Liens
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.
Though UCC Article 9 does a descriptive job over defining what constitutes as collateral under liens, there are still many disputes over ownership rights when it comes to debt and the related asset as a security interest.
Both the creditor and borrower have no interest in spending time and money in court arguing over what is and what is not collateral in any 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 parties and to provide clear details, creditors also file a UCC-1 statement. The UCC-1 statement publicly declares a creditor's right to seize a borrower's assets if the borrower defaults. A UCC-1 is required for all business loans.
The UCC-1 statement will specifically list what assets are allowed to be seized and in what order. It can also prioritize which lenders are allowed to seize assets first in case there are multiple lenders on the loan. The UCC-1 statement must be filed with local agencies in the state where the business of the borrower is located.
While it may not always be clear-cut as to how blanket liens are defined in the private sector, there is no question that the Internal Revenue Service (IRS) reserves the right to apply an "all assets" lien when individuals do not pay their taxes. A federal tax lien applies to all of the assets of an individual, such as property, securities, and vehicles, as well as to future assets that were obtained while the lien was in effect.