Assume that you intend to loan your friend $5,000. Your friend promises to pay you back by paying $100 a month. To secure the debt, your friend offers his used 2002 Jeep Grand Cherokee with a Kelley Blue Book value of $5,000. Your friend is known for financial trouble and you are worried that your friend may promise his car to other creditors he plans on borrowing money from. If you fill out and file UCC-1, the Uniform Commercial Code's financing statement, you can protect your interest in the jeep from future creditors.
Enter into a security agreement with the debtor. The debtor is the person who owes you money; you are the creditor. The security agreement is a contract between you and the debtor. It sets forth each party's rights and responsibilities (such as payment requirements, what the collateral of the agreement is, and what happens if the debtor defaults on the agreement).
Print and fill out UCC-1, the Uniform Commercial Code's financing statement. This document further details your agreement. It lists the debtor's name and address, your name and address, and it describes what the collateral is in the agreement. The collateral is what secures the debt. In our example the Jeep is the collateral.
Check with your state as to where to file the UCC financing statement. Some states require you to file this form with the Secretary of State; others require you to file it with the Superior Court. Call your state's treasury department to determine where to file the statement.
File UCC-1 with the appropriate agency. Typically, you must pay a filing fee; the fee will vary from state to state. Once filed, UCC-1 protects your interest in the security agreement from future creditors. The filing puts future creditors on notice of the agreement; if a future creditor attempts to seize the debtor's collateral (the jeep), you can rely on the date that you filed UCC-1 to show that you have "first dibs" on the collateral.
Re-file UCC-1 every five years. A financing statement is valid for five years; after five years you must refile to continue your protection. Amend your agreement by printing and filing UCC-3. If your agreement changes (such as new collateral being offered to secure the debt), protect your interest by amending your agreement by filing UCC-3.
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