You pay off a business debt that is secured by collateral, and sometime later a new lender or potential buyer conducts a lien search. They see your old UCC financing statement on file. How long does it take to clean that up? It depends on the old lender. If the lender voluntarily files a termination, it can be fast. If not, you can send a signed demand to the lender, and the lender then has 20 days to respond. If the lender doesn’t act, you can file the termination yourself. If nobody takes any action, the financing statement expires after five years unless the lender files a continuation.
UCC Financing Statement
In a secured loan, the lender’s usual way to record its security interest in the collateral is to file a UCC Financing Statement. That filing makes the lender’s claim senior to other claims on the collateral. It is usually done right after the borrower signs the security agreement and loan papers. When the loan is paid off, you might think the filing disappears, but it may remain on the record. In North Carolina the UCC financing statement is filed with the Secretary of State. If the collateral is in fixtures, the financing statement is a fixture filing and is filed in the real estate records of the county where the real property is located (e.g., Register of Deeds in Mecklenburg County).
The UCC Financing Statement is good for 5 years. After that it’s not valid anymore as far as other secured parties are concerned, unless the lender files a “continuation” to keep it valid. The UCC doesn’t require the lender to automatically file a “termination” when the loan has been paid off (only if the collateral is consumer goods). In commercial situations, a lender might or might not file a termination. So if you are simply waiting for the filing to go away on its own, understand what that means. The five-year clock starts running from the date of the filing (not the date the loan was paid off). Depending on when the lender filed, that could still be years away, and in the meantime a new lender or business buyer will want to see that the old UCC filing is gone.
What if the debt is paid, the financing statement has not lapsed (yet), and the secured party simply has not bothered to file a termination? This could be a problem when your business needs financing from another lender, or in the due diligence process for a buyer in a merger or acquisition. A lien search will reveal a valid financing statement, but there’s no debt for it to secure any more. It should be formally terminated. For a business owner who is already stretched thin, a stale filing like this can be more than a paperwork annoyance. When you are trying to procure finance from a new lender, or sell the business, a stale financing statement can raise big questions for your due diligence team or prospective buyer. The issue is that they can see a financing statement, but can’t find any underlying secured debt.
The Secured Party Must File a Termination Statement
UCC 9-513 says that the secured party must file a termination statement, or send the debtor a termination statement so the debtor can file it, within 20 days after receiving an authenticated (signed) demand from the debtor. This requirement exists when there is no longer any debt secured by the collateral and no promise to make another loan or advance any more value. If the secured party does not file or send the termination statement within 20 days, the debtor can file the termination themselves, assuming the debtor does not owe any money to the secured party.
The best practice is to draft the demand, sign it, and retain proof of delivery to the lender because the 20 days run from the date the lender receives a signed demand. Do the math. If the lender has failed to file or issue a termination within that time and there is no balance due, file the termination on your own.
If a secured party doesn’t file, or doesn’t send you a termination, it can be sued under the Code for damages (UCC 9-625(b)), including where the failure prevents you from getting alternative financing or increases its cost, and for a $500 penalty (9-625(f)). There are other scenarios where a debtor can file a termination, such as where it never authorized a filing, but in practice that’s unlikely to apply because the loan or security agreement will almost certainly authorize it. We are not a law firm; when litigation is the right call, we refer owners to a vetted independent attorney.
If There’s Still a Balance
The only time the procedure will work is when the debt is fully paid and nothing is owed to the secured party. If there’s still a balance, the lender has no duty to cancel the filing and the lien remains on your record. Then the way to clear it is to pay it off or negotiate with the creditor to settle for less. At Delancey Street, our senior advisors negotiate with funders and lenders for less than the full balance owed; we do not sell you another loan.
So, how long does it take to remove a UCC lien? When nothing is owed, the law puts the lender on a 20-day clock from the day it receives your signed demand. Although it’s a process that can take a few weeks, you don’t need to worry that you or your company is permanently stuck with an encumbrance on your collateral. If a balance is still owed and you are weighing whether to negotiate, settle or file for bankruptcy, a first consultation with us is free and confidential, and if a cheaper option exists, we will tell you on the first call.
