What Is a UCC-1 Statement?
A UCC-Uniform Commercial Code-1 statement is a legal notice filed by creditors to publicly declare their rights to potentially obtain the personal properties of debtors who default on business loans they extend. Often abbreviated as "UCC-1," these notices are typically printed in local newspapers to alert the masses of the creditors' intentions.
UCC-1s are required for all business loans under the Uniform Commercial Code (UCC) and establish a relative priority over which specific assets may be seized, and in what order, while solidifying the collection pecking order in cases where there are multiple lenders to the same debtor.
- A UCC-Uniform Commercial Code-1 statement is a legal notice filed by creditors in an effort to publicly declare their right to seize assets of debtors who default on loans.
- UCC-1 notices are typically printed in local newspapers, in an effort to publicly express a lender's intent to seize collateralized assets.
- These forms are mainly used to smooth out collection processes, often by helping lenders secure court orders authorizing them to seize assets from delinquent borrowers.
- These forms must be filed with agencies located in the state where the borrower's business is incorporated.
- There are two types of UCC-1 statements: blanket liens and liens attached to specific collateral.
Understanding UCC-1 Statements
The UCC-1 statement serves as a lien on secured collateral, where the components and filing procedures are comparable to the lien requirements in residential mortgage loan contracts. The UCC-1 statement is a directive of the Uniform Commercial Code, which governs business deals and activities in the U.S.
According to the ninth article of the UCC, entitled "Secured Transactions," a lender must incorporate completed UCC-1 statements in a business loan’s contract for it to be deemed effective. The statements must include detailed information about the borrower, and they must itemize descriptions of all assets named as the secured collateral for the loan. While virtually any type of asset may serve as such collateral, the most commonly used items include real estate properties, motor vehicles, manufacturing equipment, inventory, and investment securities such as stock and bond holdings.
As with any ordinary lien, lenders must perfect the UCC-1 statement by filing it with the appropriate agency in the state where the debtor company is incorporated. In most cases, UCC-1 statements are filed with the Secretary of State, which subsequently time-stamps the document and assigns a file number to the associated parties.
In industry jargon, the process of issuing UCC-1 notices is referred to as "perfecting the security interest" in the debtor's property.
Types of UCC-1 Statements
Lenders have the option of filing the following two types of UCC-1 statements:
- Specific collateral UCC-1 statements. These are most commonly used in real estate or equipment transactions. They give lenders first-order secured rights to real estate properties or specific collateral such as the equipment purchased with the loaned funds.
- Blanket lien. This gives the lender secured rights to a range of assets, as long as the terms of these liens are detailed in the collateral section of the UCC-1 statement. Lenders tend to prefer blanket or "all-asset" liens.
How a UCC Filing Affects Credit Scores
Like individuals, most businesses have a credit report and score. While a UCC lien will appear on a business' credit report, it won't necessarily have an immediate negative impact on the business' credit score, unless the business should default on the underlying loan.
The loan attached to the UCC filing will also increase a business's credit utilization ratio, which, if it gets too high, can negatively impact the score. Furthermore, the business won't be able to use the same piece of property as collateral for a different loan if there is a lien attached to it.
Example of a UCC-1 Statement
Say a construction company named Alex's Excavation applies for a business loan in order to purchase two new hydraulic excavators. Bank XYZ is interested in offering Alex a loan, and as part of the contract, it files a UCC-1. Shortly after, Alex's Excavation loses one of its biggest construction contracts, and then another, and the company is forced to file for bankruptcy.
Because the company had several lenders, it's likely Bank XYZ would not be given first-order rights to Alex's property and would have to wait until all other lenders were paid. However, because the bank filed a specific collateral lien on the two excavators, it received the property/cash mentioned in the UCC-1 statement in a timely fashion.
What Are the Benefits After Filing a UCC-1?
Filing a UCC-1 allows creditors to collateralize or “secure” their loan by utilizing the personal property assets of their customers. In the event of a customer defaulting on their loan or filing for bankruptcy, a UCC-1 elevates the lender's status to a secured creditor, ensuring it will be paid.
How Do You Remove a UCC Filing?
While rules vary by state, there are essentially two ways to remove a UCC lien. The first is to ask the lender to immediately remove the lien upon full payment of the loan by filing a UCC-3 statement. The other option, if your lender fails to file a UCC-3 after you've paid off the loan, is to visit your local Secretary of State office and swear under oath that you have fulfilled the debt in full and request to have the UCC-1 removed.
How Long Does a UCC Filing Last?
A UCC-1 statement is effective for five years. After this five-year period, the lien becomes null and void.
What Is a Continuation Statement?
A continuation statement is an amendment attached to a UCC-1 financing statement. Continuation statements extend the lender's lien on the borrower's collateral past the original financing statement's expiration date. When a lender files a continuation statement, the continuation statement extends the UCC-1 financing statement by five years from the date of filing.
The Bottom Line
UCC filings let creditors notify other creditors about a debtor's assets that are used as collateral for a secured transaction. UCC liens filed with the appropriate Secretary of State offices serve as public notice of the creditor's interest in the assets. To check for UCC filings, visit your Secretary of State's website.