What Is A UCC Filing?
Collateral is used by creditors to safeguard their investments. Financial security can be provided through collateral, but only if creditors adhere to all legal restrictions. If not, a secured creditor may lose priority over other creditors or may not have any legal rights to the collateral. By properly securing your transactions, an accomplished securities lawyer can assist your company in safeguarding its assets.
A creditor may achieve precedence over other creditors in a variety of ways. For instance, mortgage lenders submit particular legal documents with the recorded deed to guarantee that they have a secured interest in the property in the event that the borrower fails to make the necessary mortgage payments. The county recorder makes these documents available to the general public. Because of this, the mortgage lender has the right to assert its ownership of the property before other parties and to be given precedence in any bankruptcy procedures the borrower may initiate.
Businesses that have a secured interest in collateral are subject to the same rules. The Uniform Commercial Code sets the guidelines for drafting all legal documents. The Secretary of State’s office receives these “UCC filings” and records them. Other creditors are given notice through these public records. The security is protected since other creditors have been informed that the secured creditor has priority.
Security Interest vs. Perfection of Security Interest
A security interest in collateral may be obtained by a creditor, but unless that interest is perfected, it does not provide much protection for the creditor. A security interest is considered perfected when all necessary legal measures have been taken to elevate the creditor’s interest over other competing claims to the collateral. When a mortgage is officially registered and all other claimants are informed of the lender’s security interest in the property, as in the case of a home mortgage, the lender’s security interest is perfected. Similar to this, once a company files a formal UCC filing with the Secretary of State, the security interest in the collateral is perfected. These documents also notify competing claimants of the security interest.
In the case of an unperfected security interest, the collateral is nevertheless subject to the creditor’s legal rights. For instance, if the borrower stops making payments, the creditor may file a lawsuit to make the borrower comply with the terms of the original loan. An unperfected security interest, however, cannot be used to compel payment from those who were unaware of the security interest. Therefore, the secured creditor might not be able to assert priority if another creditor tried to bring a claim against the same asset. The asset can be sold by the court, and the money would be used to pay off both obligations. The secured creditor may lose some or all of its initial investment if there are not enough proceeds to pay off both loans. This is why it’s crucial to perfect a security interest in accordance with all relevant state and federal legislation.
