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UCC & Corporate Due Diligence

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FAQ Series #2: Why should I search for Tax Liens and Judgment Liens?

March 26, 2010 UCC, Tips

FCS service representatives are often asked to help customers determine what searches to perform as part of their pre-funding due diligence. While FCS can offer no legal advice as to what liens to search for, we are happy to share the benefits of searching for Tax Liens and Judgment Liens in addition to UCC and/or Fixture Filings.

Frequently Asked Question # 2:

Why should I search for Tax Liens and Judgment Liens?

Determining Priority
Just like a UCC Financing Statement, a Tax Lien or Judgment Lien has priority relative to other liens, based on its date of filing. The purpose of filing a UCC Financing Statement is to secure a position to collect. Therefore, it is critical for a lender to know if an outstanding Tax Lien or Judgment Lien obligation exists prior to funding, as these liens will likely prime a subsequent perfected UCC Financing Statement in the event of a default.

Involuntary Liens
Tax Liens and Judgment Liens are involuntary in nature. Meaning the financial obligation they represent is one the debtor has not entered into willingly. These lien types do not require a debtor signature and unlike UCC Financing Statements, there is no underlying agreement to which both parties agree.

A debtor cannot be counted on to disclose Tax Liens or Judgment Liens to a potential lender; in some cases, the debtor is not even aware of their existence. As such, a public records search to include Tax Liens and Judgment Liens is an essential step in creating comprehensive profile of a prospect’s outstanding obligations and ability to repay debts.

Remember, in many jurisdictions, Tax Liens and Judgment Liens can be filed with either the state or the county. An exhaustive lien search in these jurisdictions will include a search of both state and county filing offices.

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