When a lender takes collateral for a loan, it usually files a UCC-1 financing statement with the state. That filing is public, and investors and acquirers check for it. The most common problem is not the debt itself. It is a filing for a loan that was paid off years ago but never released.
How UCC filings work
- A UCC-1 is filed with the relevant state filing office, typically the Secretary of State in the debtor's jurisdiction.1
- A financing statement is effective for five years from its filing date unless the lender files a continuation.1
- A continuation can only be filed in the six months before the lapse date.1
- When a loan is repaid, the filing is removed with a termination statement (a UCC-3). Lenders do not always file one on their own.
Why it matters in diligence
- An open filing tells a buyer or investor that some or all of your assets may be pledged.
- "Blanket" filings covering all assets can conflict with new financing.
- Filings may sit on a subsidiary or an old entity name.
How to clean up
- Search the filing office in each state where the company and its subsidiaries are organized.
- Match each filing to a loan or lease, and confirm whether it is still outstanding.
- For paid-off debt, ask the lender to file a UCC-3 termination, and keep a copy of the payoff letter.
- Keep a list of open filings and their lapse dates in your data room.