A security interest provides lenders with the promise of repayment if a borrower defaults on a loan. In this instance, the lender may recover the amount of the loan by seizing and selling the asset used as the loan’s underlying collateral. Perfection is an important component of a secured transaction and in many cases achieved by the filing of financing statements with the California Secretary of State.
Lenders as secured parties must file their UCC-1 Financing Statement expediently and accurately to properly perfect their security interest in loan collateral. If a financing statement is incomplete, inaccurate, or untimely filed, it may remove a lender from a position of relative priority and allow secondary parties to claim a priority position. Here are some more common mistakes that secured parties make when filing financing statements:
*Failing to review acknowledgment copy
Much too often a filing party will fail to review the filing office’s acknowledgment of the filing of the financing statement. A careful review of the acknowledgment may identify problems sooner than later allowing the lender to easily fix them at the time of discovery.
*Failing to file promptly
Delays in filing financing statements may prove costly as the failure to perfect may cause an interest to be treated as a general unsecured debt in bankruptcy. For example, an involuntary bankruptcy petition filed during the short period between the advancement of funds and filing of the financing statement left secured parties unperfected. In Re: Millivision, Inc., 2007 U.S. App. LEXIS 873 (1st. Cir. January 16, 2007).
*Failing to file at the correct location
UCCs are typically filed based on the location of debtor rather than the location of the collateral. If the debtor is a registered business, the financing statement is filed in the debtor’s home or domicile state. If the debtor is an unregistered business, it’s filed in the state where the debtor’s chief executive officer is located. For individuals, it is filed in their state of residence.
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