How to Discharge a Debt with UCC: What Business Owners Need to Know

You took out a loan to buy business equipment or property. The equipment helps you create products and serve customers. Business loans typically fund commercial real estate, vehicles, office equipment, or inventory.

Timely payments keep you in good standing. But when sales decline and revenue drops, loan payments become difficult.

Defaulting on a business loan carries severe consequences for you and your company. Most lenders use a Uniform Commercial Code (UCC) lien to guarantee collateral before lending money. The items you purchase can serve as collateral. So can your personal property, like your home or vehicle.

When your company faces financial disaster, you need to address the debt quickly. You want to keep the property you need to operate while modifying loan terms.

What Are UCC Filings and UCC Liens?

Business loans usually include a UCC filing. The UCC filing identifies property you’ve pledged in return for funding. Your creditor uses this filing to place a UCC lien against the property.

A UCC lien gives creditors additional security. If you default on the loan, the creditor can seize the property identified in the lien. Creditors with the first lien have first rights to the property. All liens expire within five years, but creditors can renew them for long-term loans.

Two types of UCC liens exist:

• A lien against specific collateral concerns specific assets only
• A blanket UCC filing covers all business property in the company

Specific collateral liens target particular assets. An equipment lender may retain rights to purchased property but not other business assets.

Blanket UCC filing liens are all-encompassing. The creditor retains rights to all business property. If you pledged personal assets in the loan, the lender can claim them upon default.

Businesses with blanket UCC filings struggle to obtain other credit until loan repayment.

How Does a UCC Filing Impact Your Business?

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

Funding comes from equity or debt. Equity grants investors ownership portions. Debt requires regular payments to creditors.

Taking on debt can benefit businesses that use it appropriately. But debt creates future implications for the company.

Businesses build credit history like individuals. Their credit impacts loan eligibility. An organization’s credit report lists all UCC filings from lenders. The filings indicate affected equipment and collateral ownership.

UCC filings can limit future financing options. Without equipment available as collateral, creditors have less security. Our partner Solo helps business owners respond to debt collection actions and negotiate better terms.

Loans secured with UCC filings put your collateral at risk. If you cannot repay the loan, lenders can recover and sell the property.

How to Eliminate a UCC Lien

The best way to eliminate a UCC lien is paying off the debt. When you pay off the debt, the lender must release their hold on assets.

After you pay off a business debt, the lender must file a UCC-3 statement. The statement removes the lien on the property. If the lender delays filing the notice, send a written letter demanding lien release.

If you discover an old lien from a repaid loan, approach your local secretary of state office. Most states remove UCC liens when owners provide an oath that the loan no longer exists.

Company owners who use an oath must verify their statement is truthful. Lying about loan repayment to remove a UCC lien carries serious consequences. You face fines, penalties, and possible jail time.

Can Bankruptcy Discharge a UCC Lien?

Bankruptcy eliminates unsecured debts effectively. But bankruptcy does not discharge loans secured by a UCC lien. Business owners who can’t meet credit obligations can lose property secured by UCC liens.

If you want to retain property held by a UCC lien, resolve the debt with your lender. Ask whether they can lower payments and extend the loan length. Request a short-term forbearance if needed.

If recovery seems impossible, consider bankruptcy. Business owners typically declare Chapter 7 or Chapter 11 bankruptcy. Sole proprietors are eligible for Chapter 13 bankruptcy.

Chapter 7 bankruptcy works best when the business isn’t salvageable. Chapter 7 absolves the company of most debts. You must hand over all collateral held by secured loans. But it eliminates remaining unsecured business loans.

If your business has survival potential, Chapter 11 bankruptcy is better. Under Chapter 11 bankruptcy, the company continues operating.

You may retain property held as collateral if you and creditors agree on repayment terms. The UCC lien remains until you successfully discharge it through repayment.

Get Help Responding to Debt Collectors

Dealing with debt is stressful and overwhelming. But you don’t have to face it alone.

When a debt collector initially contacts you, consider sending a Debt Validation Letter. The letter forces them to verify the debt before continuing collection efforts.

If you’ve been sued for a debt, respond to the lawsuit with a written Answer. File it with the court and send a copy to the opposing attorney. Our partner Solo helps you respond to your case and increase your chances of winning.

You can settle a debt for less than you owe by sending an offer. Many debt collectors settle for less because it guarantees they’ll recoup some loss.

What Is Solo and How Can It Help?

Solo makes it easy to resolve debt with collectors. You can use Solo to respond to a debt lawsuit and send letters to collectors. You can even settle a debt through their platform.

Solo’s Answer service is a step-by-step web app. It asks all necessary questions to complete your Answer. Upon completion, an attorney reviews your document and files it for you.

Solo can help you contact your debt collector and negotiate the debt. You can settle for less, all online. It simplifies and streamlines the debt settlement process.

No matter where you find yourself in the debt collection process, Solo helps you resolve your debt.