The Uniform Commercial Code Article 9 includes details about secured transactions and the discharging of debt in lending situations that involve some form of collateral. Legally, after a debt discharge, the creditor has no legal basis to pursue the debtor and has no claims on the assets that are currently owned by the debtor or assets that the debtor acquires in the future. The discharge marks the end of the lending agreement.
Uniform Commercial Code
Prior to the creation of the Uniform Commercial Code, every state had its own commercial laws. This created problems for companies and individuals that operated across state lines, which the UCC alleviates. The Uniform Law Commissioners and the Law Institute, regularly review the UCC and have the power to make amendments to the original document. Every state bases its laws on the UCC, although laws in most states deviate from the document to some extent.
Under the UCC, in the event of borrower default, a creditor may take possession of the collateral that the borrower pledged to secure the loan. The creditor must sell the collateral and use the sale proceeds to cover the cost of repossessing it, holding it and listing it for sale. The creditor also can use sale proceeds to pay off the unpaid debt and to satisfy any junior liens that were secured on the property if junior lienholders provide proof of those debts.
Sale of Collateral
Article 9 of the UCC states that the creditor must dispose of the collateral in a commercially reasonable way. The creditor must notify the debtor and all other lienholders prior to the sale, although the UCC does not provide an exact time frame other than saying the creditor must give "reasonable notice." In instances involving non-consumer goods, the creditor must provide interested parties with 10 days notice. If the creditor fails to notify the debtor of the sale, the debtor can seek damages that amount to 10 percent of the principal owed on the debt plus any service charges that were incurred.
In instances where the debtor had paid less than 60 percent of the debt owed, the creditor can retain the collateral in exchange for discharging the debt. The creditor must give the debtor and any other lienholders a written proposal and the debtor and other creditors must accept the terms of the agreement. If the debtor or another creditor with a security interest in the collateral rejects the proposal within 21 days of receiving notice, then the creditor must sell the property. In situations involving consumer goods, the creditor can seize the collateral and discharge the debt without gaining the debtor's consent.