Problems with Perfection by Filing

Under the Uniform Commercial Code (the UCC), each State has established a system for recording Financing Statements. Financing Statements are used by a creditor to give notice to any interested party that the creditor holds a security interest in some or all of a company's assets. The UCC requires filing to perfect a security interest.

One of the problems with perfection of a security interest by filing is that each State determines where UCC-1 Forms must be filed. Some States have established a central filing requirement - often with the Office of the Secretary of State (or the equivalent). Some States require creditors to file at the State and County level, and this is where creditors that are trying to save some money sometimes get into trouble. In a State with a dual filing requirement, a creditor that files only once will not have a perfected security interest in its debtor's asset(s).

There are exceptions to these rules. For example, in some States with dual filing requirements if a customer has offices in more than one County a creditor must either:

• File only with the State agency
  OR
• File in every County in which the customer has a place of business

Credit managers that are not comfortable with handling every aspect of the process of perfecting a security interest have two basic choices. They can:

• Use a third party filing service. The advantage of using a filing service is low cost combined with a certain amount of expertise, and occasionally advice intended to help the creditor avoid pitfalls and problems.
• The credit manager can use an attorney. The advantage of using an attorney is that he or she will be able to offer advice to the creditor in addition to preparing and processing the documents necessary to perfect a security interest. The disadvantage of using an attorney is the higher cost.
  

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.