How to Discharge a Debt with UCC

Sarah Edwards | February 15, 2024

Edited by Hannah Locklear

You may have taken out a loan to obtain business equipment or property if you’re a company owner. Business equipment allows you to create or produce the goods and services that attract your customers. Typical business loans involve funding for commercial real estate, business vehicles, office equipment, or inventory.

If you’re making timely payments to your lender, you likely won’t encounter any problems. However, if your sales dry up and revenue declines, you may not be able to keep up with your business loan payments.

Defaulting on a business loan can have severe implications for you and your company. Typically, lenders use a Uniform Commercial Code (UCC) lien to guarantee collateral before lending you money for your business. The items you purchase for your business can be collateral, but so can your personal property, like your home or vehicle.

If your company faces financial disaster, you’ll want to find a way to address the debt without sacrificing your assets. If possible, you’ll find a way to keep the property you need to keep your business afloat while modifying the terms of your loan.

What are UCC filings and UCC liens?

When you take out a business loan, chances are your lender will include a UCC filing. The UCC filing identifies any property you’ve pledged in return for the creditor’s funding. Once your creditor has the UCC filing, they can use it to file a UCC lien against the property.

A UCC lien gives additional security to the creditor. If the business owner defaults on the loan, the creditor can potentially seize the property identified in the lien. Creditors with the first lien on a property have the first right of refusal on it if the borrower defaults. All liens expire within five years, but creditors may renew them if the loan is long-term.

There are two types of UCC liens: a lien against specific collateral and a blanket UCC filing.

A lien against specific collateral concerns specific assets. For instance, an equipment lender may retain a lien on the property purchased but not on other business assets.

A blanket UCC filing lien is all-encompassing. The creditor will retain rights to all business property in the company. If the company owner pledges personal assets in the loan, the lender can requisition them if the owner defaults on the loan.

Businesses whose lenders place a blanket UCC filing on an organization will have difficulty obtaining other credit until they repay the loan.

How does a UCC filing impact an organization?

Most businesses will need some funding to expand. Company growth often requires additional office space, more employees, and expenses for marketing, research and development, and sales.

Funding can come from equity or debt. Equity grants investors a portion of ownership in the company, while debt requires the business to make regular payments to its creditors.

Taking on debt can be advantageous for businesses that use it appropriately. However, debt does have future implications for the company.

Like individuals, businesses build up a credit history. Their credit impacts their ability to obtain loans. An organization’s credit report will list any UCC filings from its lenders. The UCC filings will indicate the equipment affected and its collateral ownership.

UCC filings can impact the organization’s ability to obtain future financing. If there’s no equipment available as collateral to use for a business loan, creditors have less security in recouping their money if the loan defaults.

Loans secured with a UCC filing put the company’s collateral at risk. If the company cannot repay the loan, its lenders can file to recover the property and sell it to satisfy the debt.

How to eliminate a UCC lien

The best way to get rid of a UCC lien is to pay off the debt. If you pay off the debt, the lender has to release their hold on the assets.

Once you pay off a business debt, the lender must file a UCC-3 statement that removes the lien on the property. If the lender drags its heels on filing the notice, the company owner can send a written letter to the creditor demanding that they release the UCC lien.

If a business discovers an old lien on the property from a loan repaid long ago, they can approach their local secretary of state office. Most states will remove UCC liens if the owner provides an oath that the loan no longer exists.

Company owners who use an oath to remove a loan must verify that their statement is truthful. Lying about loan repayment to remove a UCC lien can land you in legal trouble, including fines, penalties, and possible jail time.

Can I declare bankruptcy to discharge a UCC lien?

Bankruptcy effectively eliminates unsecured debts, but not loans secured by a UCC lien. If business owners find they can’t meet their credit obligations, they can lose any property secured by a UCC lien.

If you, as the business owner, want to retain property held by a UCC lien, it’s best to attempt to resolve the debt with the lender. Find out whether they can lower your payments and extend the length of the debt or grant you a short-term forbearance.

If you don’t foresee an easy path to recovery, you might consider bankruptcy. Business owners can typically declare Chapter 7 or Chapter 11 bankruptcy. Sole proprietors are eligible for Chapter 13 bankruptcy.

A Chapter 7 bankruptcy is advisable if the company owner doesn’t believe the business is salvageable. Chapter 7 will absolve the company of most debts. The business will have to hand over all collateral held by secured loans, but it will eliminate the remaining unsecured business loans.

If the business owner believes the company has a chance for survival, a Chapter 11 bankruptcy is best. Under a Chapter 11 bankruptcy, the company continues to operate.

The business may retain property held as collateral if the owners and their creditors can come to mutually agreeable repayment terms. The UCC lien will remain until the owner can successfully discharge them through repayment.

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