If your business has fallen behind on a loan and the lender has a UCC filing against you, you’re probably worrying that your bank accounts are next. You might wonder whether a UCC lien can freeze your bank account. And the answer is…not really. A UCC lien does not automatically freeze your business bank account. It is a lender’s claim on an asset you’ve pledged as collateral. We can’t say for sure what your specific creditor can do with your bank accounts - it depends on whether that creditor has a lien or judgment against you. But we can get more specific about the general rules. And it’ll be easier if we break your assets down.
Let’s start with the basics. When you sign a contract to buy a piece of equipment or you’re approved for a business loan, the paperwork lets the lender file a UCC lien. That filing goes to the secretary of state in your business’s home state, and it lists just three things: your name and address, the lender’s name and address, and a description of the collateral. That’s it. UCC filings are public. Anybody can look them up, and the notices often run in the legal newspaper of record. In effect, this form is telling anyone who runs a UCC search that the lender has an interest in the assets listed on the form. A public UCC record lasts five years. The lender needs to renew the filing to keep it active.
A UCC lien is a way a lender makes sure it can pay themselves back with the collateral that you put up, like a piece of equipment or even the whole business. And if you back out and don’t pay the lender back, the UCC lien gives the lender a claim on that collateral they can take. It protects the lender if you default or file bankruptcy. With that in mind, here are six things a UCC lien, and the creditor behind it, can and can’t touch.
The first is the equipment you financed. Say you run a restaurant in Chicago and borrow to buy a new espresso machine. Until the loan is paid in full, the machine is collateral and the filing sits on your business credit report. Once you default, the lender has the right to repossess the espresso machine and use the proceeds to repay the loan. No surprise there. The lien can also let the lender seize other property your business owns.
The second is everything else you pledged. The lien may cover one specific asset or the entirety of your business assets. It can reach real estate or any other business asset. Anything the business owns can be covered by a lien. So it could be “every business asset,” but it doesn’t have to be. It can just be the particular asset. In the worst case, the UCC lien could let your lender take all the assets you pledged as collateral.
The Cash in Your Bank Account
The third is the one owners lose sleep over: the cash in your bank account. Your bank account is not directly at risk but could be levied if the creditor has a judgment. If the creditor sues and wins, that judgment can be enforced against your bank account. At that point your bank account is fair game, and yes, the bank might be able to freeze your account and pay the creditor what it’s owed. A judgment creditor can usually force the sale of most business assets, too.
Protected Assets
The fourth thing is your personal belongings, and here the news gets better. Your personal property is protected to a certain extent. Even a creditor holding a judgment can’t take property that the law exempts from seizure. Exemptions typically cover furniture and clothing up to a certain value. So don’t fret too much about the fate of the clothes on your back or the sofa in your living room.
The fifth is a group of protected assets beyond the basics. It is difficult for creditors to go after retirement savings and the tools of your trade. Most states shield money in tax-deferred retirement plans. Most states also protect some of the equity in your car and your home, plus a few thousand dollars of business equipment you need to work. The exemption limits differ by state. So be sure to check your state’s exempt property list, starting with its bankruptcy exemptions, to see what applies to your secured debt.
Your Ability to Borrow
The sixth is the one that catches careful owners: your ability to borrow. But even if you’re not in default, a UCC filing can still impact you and your business. An old UCC lien may block you from securing new financing. Go back to the espresso machine. Suppose you want a second loan for more equipment before the first one is paid off. The UCC search may reveal an old loan lien that prevents you from using that equipment as collateral for the new loan until you’ve fully repaid the first. Put simply, the new lender won’t want to risk having to give it up to pay back someone else’s loan.
It can happen even if you pay every bill on time. Picture a new lender running a public records search just before your loan closes and turning up an active UCC lien. They found it at the last minute and pulled out. You check, and the lien is from a loan you paid in full two years earlier. You assume that because you paid it off, the lender would have terminated the UCC filing, too. But unfortunately, an active UCC record isn’t a mistake or a glitch, it’s the normal thing to expect in that situation. Until it’s terminated, a UCC filing can block new financing from coming in.
So before you look for new money, search the UCC records and make sure there aren’t any in force for loans you’ve already paid off. If you’ve paid off a debt, but the UCC lien remains active, contact your lender right away to get a UCC-3 form to terminate the lien. Get copies of your business credit reports or search the UCC public records and make sure there are no lingering reports of the debt.
So can a UCC lien freeze your bank account? The filing gives the lender a claim on your collateral, which may be one machine or the whole business. Your bank account comes into play when a creditor wins a judgment, and even then the exemptions protect part of what you own. If you’re behind on payments, the worst thing you can do is bury your head in the sand. Don’t close your eyes to a threatening letter from a lender. There is more to be done, and the next chapter in your debt settlement story is yours to write.
