A lien is a legal claim on property based upon a debt owed to the lien holder or creditor. It allows a creditor to use the debtor’s property as security when a debtor fails to repay a debt. It provides excellent protection for collection of a bad debt. For instance, while a debt may be discharged in bankruptcy, a creditor can still seize and sell collateral secured by a UCC lien. There are many ways to create a lien. For example, tax liens are imposed when someone forgets to pay their taxes; mortgages create liens in real estate; a judgment in a lawsuit creates a lien for the judgment amount awarded.
A UCC lien is obtained when a debtor, such as a borrower, and a creditor, such as a bank agree to ensure the repayment of the debtor’s debt with the security interest of a lien on personal property under the Uniform Commercial Code . The debtor still owns the personal property and retains possession of it, but the creditor also has an interest in it as well.
The Uniform Commercial Code (“UCC”) is a group of laws created to standardize the laws across the United States related to commercial transaction. Most states have adopted a significant portion of, if not all of, the UCC’s proposed laws. A UCC lien is a lien which has been obtained through the execution and filing of a UCC-1 financing statement, generally with the state’s Secretary of State. In New Jersey, this UCC-1 form must be filed with the New Jersey Division of Revenue and Enterprise Services. UCC liens may generally be placed on any property that is agreed to, such as equipment or vehicles.
A UCC lien is often obtained when two entities enter into a debtor-creditor relationship or otherwise enter into a promise by the debtor to pay the creditor. If the creditor is hesitant to lend the money, or is concerned about the debtor’s ability to pay the debt, the creditor may require the debtor to agree to a UCC lien. Once the debtor agrees to the UCC lien and provides the creditor with minimal information, such as the description of the property on which the lien will be filed and the debtor’s full name and address, the creditor may proceed to file the UCC lien.
The UCC lien is then a public record which provides notice to the world that a lien attaches to the property and that the property cannot be transferred unless the lien is satisfied. When purchasing a piece of equipment or vehicle, particularly from a small business (which is the entity type most likely to have UCC lien against it), the buyer should conduct a UCC search on the seller to make sure that there are no UCC liens listed against that seller. However, if the UCC search shows a lien, than the purchaser knows that she cannot buy the property without the lien being released, otherwise she may be unable to obtain clear title to the property and may be brought into litigation regarding the unpaid debt.
A UCC lien is valid for five years following its filing. However, the creditor may file a continuation statement extending the validity of the lien for an additional five years. That continuation statement however must be filed in the last six months of the first five-year period. The creditor may also be able to assign her rights to the collateral property that is the subject of the UCC lien. Further, once the debt is fully paid off, the creditor must file a termination of the UCC lien. All of these follow-up statements, including any amendments to the original UCC-1 financing statement, must be filed as UCC-3 financing statements.
UCC liens can have an effect on a wide range of individuals and entities. A UCC lien can be a useful and effective tool for enforcing the repayment of debts owed. It can also be useful in providing small businesses owners with an opportunity to obtain loans when they otherwise are unable to obtain them. Further, awareness of potential UCC liens is important for both buyers and sellers of equipment, vehicles, and inventory.
McLaughlin & Nardi, LLC’s attorneys are experienced with debtor and creditor laws, as well as searching, using, and filing UCC liens and other financial statements, and can advise debtors, creditors, buyers, and sellers of their rights in relation to such UCC liens in New Jersey. To learn more about what we may be able to do to help, please visit our website, or contact one of our New Jersey lawyers by e-mail or telephone at (973) 890-0004.