A lien is also known as a security interest. It is a legal claim to the assets used as collateral for the satisfaction of debt. Common types of liens are bank liens, real estate liens, and tax liens. A lien can be established by a lender, through legal judgment, or a taxing authority.
There are several parties involved in the filing of a lien.
- Debtor (also known as the borrower)
- Secured party (also known as the lender or lienholder)
- State or local government acts as the filing office (a neutral third party that provides the process and systems for notices to be filed and searched consistently)
A lien is established when a debtor enters into a contract with a secured party. Secured parties gain priority to the collateral over any unsecured parties if the debtor defaults on a loan. If the debt is not satisfied, the secured party may be able to seize the collateral.
Filing a public notice is the action taken to achieve priority as a secured party. The notice, also known as perfection, informs creditors and others about the lender’s security interest. A search is an information request to determine if there is existing debt, to verify if there are other secured parties, and to see if the same collateral has already been used to secure a loan or lease.
The first and most frequent public notice filing is the initial financing statement, known as a UCC-1. Financing statements are not signed or enforceable documents; they simply provide notice that a security interest may exist. This filing is effective for five years from the date of filing. After five years, the status of the filing is considered lapsed and invalid if the expiration date passes without a continuation being filed. The duration and effectiveness of a lien varies depending on the type of lien and the jurisdiction.
This means the lender no longer has a secured interest in the collateral and is considered an unsecured creditor. However, the lender can extend the secured interest by filing a continuation statement within six months before the expiration date of the lien. This extends the effectiveness of the initial financing statement another five years from the original date. Continuations are filed throughout the term of the loan to maintain the security interest until the duration of the loan/relationship ends.
Other actions related to a lien include:
- Amendment - filed to change a debtor’s name, debtor’s address, the collateral itself, or the secured party’s name or address.
- Assignment - filed to transfer a portion or all rights to the collateral to another secured party, by adding the assignee as a secured party.
- Termination - filed to end the original UCC 1, when the debt has been paid in full or the collateral is returned.
- Correction Statement - filed to correct a filing that was entered inaccurately or wrongfully filed.
- A person may file an Information Statement with respect to a record indexed under that person's name if the person believes the record was inaccurate or wrongfully filed,
- A person may file an Information Statement with respect to a record if the person is a Secured Party of Record with respect to the financing statement to which the record relates and believes that the person who filed the record was not entitled to do so.