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UCC Lien vs. Security Interest: Clearing Up the Confusion

Uniform Commercial Code (UCC) liens and security interests—what’s the difference? Both give a creditor rights over a debtor’s property, but they operate differently. Let’s break it down , so you can understand your rights and responsibilities.

Liens

A lien is a legal claim against property to secure repayment of a debt. The lienholder can seize and sell the property if the debt isn’t paid. Liens are covered in UCC Article 9.

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Common types of liens include:

  • Mechanic’s lien – Secures payment for construction work/materials
  • Tax lien – Secures repayment of overdue taxes
  • Judgment lien – Secures payment per a court’s judgment

To create a lien, the creditor simply needs to file a UCC-1 financing statement. This puts the public on notice that the creditor has a claim against the property. The debtor keeps possession of the property unless they default.

A big advantage of liens is that the creditor doesn’t have to go to court to enforce their rights. If the debtor defaults, the creditor can seize and sell the property more quickly than with a lawsuit. However, liens also have downsides—they can make it harder for the debtor to sell or borrow against the property.

Security Interests

A security interest gives a creditor rights over a debtor’s property to ensure repayment. It’s like the property is the “security” for the loan. Security interests are also covered under UCC Article 9.

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Here are some key things to know:

  • The creditor can take the property if the debtor defaults.
  • The debtor usually keeps possession of the property unless they default.
  • The creditor must file a UCC-1 to perfect the security interest and establish priority.

Security interests are commonly used with loans. For example, a bank may take a security interest in a car when making an auto loan. If the borrower stops making payments, the bank can repossess the car.

Comparing Liens vs. Security Interests

While liens and security interests have some similarities, there are also key differences:

Lien Security Interest
Creation Automatic after furnishing goods/services Created by agreement between creditor & debtor
Possession Debtor keeps property Debtor usually keeps property
Foreclosure Process Creditor can seize property without court order Court order usually required for repossession

As shown above, liens generally give creditors more power to act unilaterally. With security interests, there are more protections for debtors against improper repossession.

Defenses Against Liens and Security Interests

While liens and security interests are powerful creditor remedies, debtors aren’t powerless. Here are some defenses to challenge improper or abusive actions:

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  • Violation of UCC requirements – The creditor may not have properly filed or enforced the lien/security interest under the UCC.
  • No agreement to the lien/security interest – The property may have been pledged without the debtor’s consent.
  • Creditor waived rights – The creditor’s words or conduct showed intent to give up rights over the property.
  • “Commercially reasonable” sale – When property gets repossessed and sold, the sale process must be reasonable.
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As you can see, debtors aren’t totally at the mercy of creditors. Our courts provide protections against overreach. But , you have to understand how these creditor remedies work if you want to enforce your rights.

The interplay between UCC liens, security interests, and defenses is complex! If you have questions or concerns about a creditor trying to take your property, please seek legal assistance. An experienced attorney can review the facts and help protect your rights.

References:

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