If you own a business that is behind on payments, it helps to see your file the way a lender will. Before they lend to or start doing business with a company, financial institutions search for UCC and tax liens. It can be smart to look up what is on file against your business before a lender does.
A UCC lien is basically a legal document from a creditor that says they have a claim to specific collateral if the borrower fails to pay back a loan. While the business is up to date on payments, creditors aren’t going to come asking you to hand over the collateral they are claiming is securing a loan. But if the business runs into trouble and defaults on the loan, the liens come into play, and they establish which creditors can seize what collateral, and in what order. They also let you know which assets would be most at risk. A UCC lien search is simply the process of checking whether any of these have been filed against a person or business.
What is a tax lien search? It’s a check to see whether the federal or state government has filed a tax lien. A tax lien lets the government lay claim to a company’s assets over unpaid taxes. By contrast, UCC liens usually are filed by private creditors over loans. In the United States, it is usually the IRS that files them.
Red Flag
Why is an active lien such a red flag to lenders? Because it can signal that the business is in debt and at risk of losing assets it needs to operate. A known lien can make it more difficult to get additional financing, because other lenders will realize they are not “first in line” on the collateral. Some lenders may assume that there is no collateral left that they are interested in. Or they may fear that the business may run out of assets it can rely on before their turn. Even if your business pays the debt off eventually, the lien remains a risk until then. Lenders may monitor you regularly and set up a system to notify them if a new lien is filed, so a lien filed after you got funded may still be noticed. Don’t assume that a new filing goes unnoticed.
A lien search may tell you there is a problem. Then, you have to decide whether to keep paying, negotiate with your funders or lenders, settle, or file for bankruptcy. At Delancey Street, our senior advisors negotiate with creditors and lenders for less than the total amount that is owed. We never sell another loan.
Where They Record Liens Varies by State
Most of the places you can search are official government agencies, but the level of government where they record liens varies by state. For example, some states record them at the state level, which makes searching simpler. Others record them at the county level, which is trickier because you need the exact county where the debtor lives or does business, or where the collateral is located. It may take some searching in several places before you find a lien.
The usual starting point is the Secretary of State. Start with the state where the business is registered. There is also a slower route, the UCC-11 search. You can download the UCC-11 form (the official request for UCC information) from the Secretary of State website for the state you’re searching; New York’s is one example. You’ll have to fill out the form, send it in and wait for the documents to come back. And if that’s not slow enough, you might have to sign up for an account and/or pay a fee.
Tax liens can also turn up at a state or county recorder’s office, or on its website. Where to look depends on state law. Colorado, Mississippi, Illinois, and South Carolina have centralized registries for tax liens, where they are recorded and can be searched. Elsewhere tax liens are filed at the county level and a county may vary by whether the debtor is the business or a business owner, the county where the owner lives or where the business operates, or the county where the collateral is located. And the liens may be in hard copy, so you may have to pay for that.
For federal tax liens, you can also go to the IRS itself. The IRS Automated Lien System (ALS) database includes tax liens filed in all 50 states plus Washington, DC. You can get a copy of the database by filing a Freedom of Information Act (FOIA) request online, by fax or by mail. The IRS has clear guidelines on how to make the request and, since January 1, 2023, there are no additional fees for it. But the database may be incomplete or inaccurate. It comes on a CD, so you’ll need a device that can read it.
An Automated Tool or an API
The fastest way to do a lien search is by using an automated tool or an API, which pulls filing data directly from official government sources. Such services search multiple databases all at once instead of going file-by-file. They also take on much of the work of figuring out where a lien was filed. You can search using many different criteria: business name, individual name, address, filing number, filing type, filing status, and more. Generally, you simply type the legal name of a business and select lien search.
Want to quickly search a specific debtor in many jurisdictions at once? First Corporate Solutions offers an online Uniform Commercial Code (UCC) system that will let you search by debtor’s name (in partial or with wildcard characters) or file number. You can search specifically for UCC filings, or tie in tax, judgment and bankruptcy filings into the search and then filter the results. The system also lets you print reports. CSC Global allows for searches in all jurisdictions, including finding name variations and misspellings. It allows you to set up recurring searches that will update you. Wolters Kluwer’s iLien includes UCC lien documents, federal and state tax liens, real property documents, from multiple jurisdictions through their system that can be accessed by web, phone or fax.
If a search turns up a tax lien and bankruptcy looks like the better path, that is work for counsel. Since we are not a law firm, we refer owners to a vetted independent attorney. The attorney-client relationship is between the owner and that attorney.
A lien on file serves as a red flag to potential lenders, but it is not the only thing they consider when assessing your loan request. Liens also give valuable information about the current financial and operational status of the business, so be sure you know what your own record shows. A first consultation with Delancey Street is free and confidential. If there is a cheaper solution, we tell you on that first phone call.
