Paying off a business loan doesn’t automatically release the UCC lien. The lien remains in the public record until the lender files a termination statement or you take steps to clear it. When you take out a business loan and grant a security interest in your assets, the lender files a UCC-1 financing statement. This is a public notice that they have a claim on your collateral - your business equipment, inventory, accounts receivable, etc. You pay back the loan in full. Naturally, you assume the security interest has been released. But here’s the problem: the lender might forget to file a UCC-3 termination statement. Maybe they’re busy with other loans or just overlooked it. The result? The UCC-1 is still “active” in the system.
Why does this matter? Because it can make it harder for you to get your own financing next time. Lenders will think twice about giving you money if there’s a cloud hanging over your assets. If the lender hasn’t filed on its own, you have to ask for it in writing. Otherwise, it might not happen. And in the meantime, the financing statement is still hanging out there.
Filing a UCC-3 Form
Clearing it takes a termination. That’s done by filing a UCC-3 form. A “UCC-3” is used for any amendment, including continuations, terminations, assignments, party names, collateral, etc. See Section 9-512. So who does the filing? It’s usually the lender. But that’s not the whole story. According to UCC 9-509, a financing statement (or a termination of it) must be authorized by the proper party in order for the filing to be effective. You’d think that would be pretty simple: the secured party of record, but it’s not. Sometimes, the debtor can also authorize the filing. Let’s see when.
A debtor can authorize the filing of a termination of a financing statement only if (1) the obligation secured by the collateral has been fully discharged in accordance with the terms of the security agreement and (2) no commitment has been made to make advances or otherwise give value (Section 9-513). What does all that mean? In plain English, if the loan has been fully paid in accordance with the terms of the security agreement and the lender is not committed to advance any additional funds, the debtor can authorize the termination of the UCC-1.
File the UCC-3 Yourself
If that describes you, the first step is sending an authenticated demand letter to the secured party of record (the name and address of which will be on the UCC-1), asking it to file a UCC-3 form making a termination. Hint: send it certified mail, with a copy of the original UCC-1, so you can prove that it was received. Then, within 20 days, the secured party must file the termination or give the debtor one to file. If it doesn’t, you can file the UCC-3 yourself.
Here’s how. On the UCC-3 form, put in the filing number of the original UCC-1, select “Termination” in the “type of amendment” box, enter the name of the party authorizing it, and if you’re the one making the request, check the box for debtor. And then check it again. And file it with the Secretary of State or the county office where the original UCC-1 was filed. An omission (the debtor’s name, the party authorizing it, the filing number) can mean that the filing office will reject the UCC-3 termination.
If the secured party of record is more than one person, they all have to be named on the UCC-3 or each must file its own. Otherwise, only the name(s) of the secured party specified on the UCC-3 will be released and the statement will continue to be effective with regard to those who aren’t named. For fixture filings, the UCC-3 must also contain a legal description of the real property (9-512), and the box labeled 1b must be checked, so it’s filed in the real estate records. What if only some of the collateral is being released? Then it’s a collateral amendment. What if only one of several debtors is being removed? That’s a party amendment.
Proof That the Termination Was Filed
And if the secured party doesn’t file a termination, leaving you stuck with an inability to obtain other financing? UCC 9-625. The secured party can be liable for $500 and actual damages.
Finally, hold on to proof that the termination was filed, because if the loan collateral was used as collateral for a new loan, the new lenders may ask for written verification that the loan was paid off and the collateral is no longer encumbered.
