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Published Articles by David Balovich

Title: Protecting Your Assets In Uncertain Times
Published in: Creditworthy News
Date: 11/24/09

The Dow Jones for the second week in thirty days has closed over ten thousand giving optimists reason to speculate the recession is finally coming to a close. Others would reason that corporate downsizing, responsible for increasing unemployment to over ten percent, coupled with continued bankruptcy filings and bank failures has strengthened balance sheets while income statements have remained sluggish and are responsible for the improved Dow. Regardless of the position one takes the reality is that revenue is down, unemployment is up and bankruptcies and bank failures continue to increase. U. S. debt has increased nearly $3 trillion in 2009 – five times what had ever before been borrowed in a single year prior to 2008 when the debt increased by more than $1 trillion for the first time is U.S. history – and the year is still not over. The effect of the recent bankruptcy filing of CIT, the major floor-plan and account receivable financial institution, still remains to be realized and the upcoming holiday season will be the deciding factor for major retailers as to whether some will continue operations in 2010. 

For those commercial businesses that will survive this economy many are looking at their credit operations and asking what more can we do to protect our account receivables, the second most important asset for any business. The choice is to continue as an unsecured creditor or take advantage of the laws that give creditors the option of guaranteeing their accounts receivable as a secured creditor. This is especially important in a climate where banks, in spite of government urgings, continue to be reluctant to lend money and the utilization of credit cards as an alternative source of funds is becoming more restrictive and difficult to manage. 

In North America, both Canada and the U.S. have laws that provide for creditors to secure their sales. In the U.S. the law that provides for creditors to secure their credit sales is contained in the Uniform Commercial Code, specifically, Article Nine. Under Article Nine the creditor may secure sales, consignments, bailments, rentals, and leases. In Canada the law is contained in the Personal Property Security Act and in turn responsible for the creation of the Personal Property Registry. 

On more than one occasion over the years in this newsletter, we have advocated the reasons to be a secured creditor not only from the standpoint of protecting and recovering the firms’ assets but also from allowing firms’ assets to be used by other creditors to secure their position. We have often said; “why would one allow their competitor to use their assets to recover their competitors receivables?” 

We will not again belabor our opinion about the importance of being a secured creditor. Instead we will address the most common questions brought to us about how to become a secured creditor and what is necessary to perfect a secured position. 

We want to emphasize that the following responses to frequently asked questions is not legal advice. It is information that can be found on any state website. Legal questions should always be addressed to ones corporate attorney and/or counsel. 

What is a financing statement?

A UCC financing statement (also referred to as a UCC-1) is a short, simple record filed for the purpose of giving constructive notice of a secured party's interest in property of the debtor.  It provides the name and address of the debtor, the name and address of the secured party and a description of the debtors’ property being used as collateral. In contrast, the real property secured creditor will record the security instrument itself (mortgage or deed of trust) to give constructive notice of a consensual lien on real property.  While a financing statement is a short and simple record, Article 9 devotes twenty-seven sections to the filing system. 

How does one perfect a financing statement?  

To perfect a security interest by the filing of a financing statement where a financing statement is a permissible method of perfection, the financing statement must be sufficient, it must be effective, it must be filed, and it must be filed in the correct location. We explore each of these requirements in turn.  


A financing statement is a record that contains certain information.  The record may either be written or in electronic form.  To be a sufficient record, the financing statement must provide the name of the debtor and the name of the secured party (or representative of the secured party) and must indicate the collateral covered by the financing statement).           


A financing statement is effective only if filed by a person entitled to file it. Typically, the secured party files the financing statement.  The secured party is entitled to file the financing statement if the debtor authorizes the filing.  The debtor provides such authorization by either becoming bound under the terms of a security agreement or by giving the secured party authorization to perfect a financing statement. Under RA-9, authorization by the debtor may be included in a sales or credit agreement.  Note that a financing statement is neither signed by the debtor nor secured party to be effective. 


A financing statement is deemed filed when the filing office to which it is sent accepts it for filing. Acceptance of a financing statement by a filing office will routinely take place when the financing statement is communicated to the filing office accompanied by the requisite filing fee.  Filing fees are specified in a state's version of the U.C.C.  

The filing office is obligated to index financing statements accepted for filing, generally by the name of the debtor, but a mistake in indexing by the filing office does not affect the effectiveness of the financing statement. For this reason only the legal name of the debtor should appear on the financing statement. Trade names, doing business as, and trade styles should not appear on the financing statement.  

Where is the correct location to file a financing statement?

To perfect the security interest the financing statement must be filed in the correct location.  If filed only in an incorrect location, even if sufficient and even if effective, the financing statement will not perfect the security interest.  When the debtor is a corporation the financing statement should be filed in the state where the debtor corporation is incorporated regardless of where the corporate office is located or where the secured property is kept or shipped to. When the debtor is a partnership or a proprietorship the filing is in the state where the debtors’ headquarters office is located.

 How long is the financing statement good for?

Generally, the financing statement is effective for five years from the date of filing. At the end of the five year period, absent renewal, the effectiveness of the financing statement lapses. It may be renewed for a five-year period (and for successive five year periods) through the filing of a continuation statement, UCC-3, during the last six months of the five-year period.  A continuation statement not filed within the six-month period is ineffective.   

What is a UCC search?

If the filing of a financing statement is a permissible method of perfecting a security interest, someone wishing to know whether someone else claims a security interest in personal property or fixtures of the debtor must search for a financing statement in the appropriate location.  Any person may initiate a search with the secretary of states office and obtain the relevant information by submitting a request, form UCC-11, to the appropriate filing officer.

How much does it cost to file a financing statement?

Filing fees vary by state and can normally be found on the state web site or by calling the secretary of states office. At this time the minimum state filing fee is $5.00 and the maximum is $84.00. Several states today charge more for a paper filing than an electronic filing.

We wish you well.  

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.  

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