What Is a Blanket Lien?
A blanket lien is a lien on all or nearly all of the borrower’s assets. If the borrower defaults, the creditor holding the blanket lien has the right to take and/or sell off any or all of the borrower’s assets covered by the blanket lien. Blanket liens can cover tangible assets, such as office equipment and accounts receivable. Blanket liens can also cover intangible assets, such as leases.
Blanket liens are established by contract, although they are subject to certain limitations. Blanket liens are most common in short-term business financing.
What Does a Blanket Lien Look Like?
Blanket liens typically come in two forms. A blanket lien can list all the types of property that the creditor can collect should the debtor fail to repay the creditor. These liens are typically phrased: "A lien on Accounts Receivable" or "A lien on Inventory."
On the other hand, a blanket lien can be much broader. Blanket liens can cover all assets that the borrower currently owns or assets that the borrower will acquire. Borrowers should be especially wary of blanket liens which attach to future assets since such liens could limit or outright prevent borrowers from taking out other liens. Creditors who are unable to attach liens are often unwilling to extend credit to borrowers.
Is There Anything That a Blanket Lien Cannot Cover?
Although blanket liens have a wide range, there are certain exceptions.
The most significant exception is that a blanket lien cannot secure property which requires government consent. Licenses, patents, and trademarks, among other government issued permits, cannot be secured by blanket liens (although there are certain exceptions to this exception).
Payroll deposit accounts are also beyond the reach of a blanket lien. If an account is used exclusively to pay employees and/or payroll withholding taxes, then the creditor cannot access the account. Payroll deposit accounts are held in trust on behalf of employees and the borrower itself has no right to offer such accounts as collateral.
What Happens If the Borrower Files for Bankruptcy?
Under Chapter 7 bankruptcy, debtors have the right to exempt certain property from creditor collection. Debtors who go through Chapter 7 bankruptcy may avoid, or nullify, liens which impair certain debtor exemptions. The Bankruptcy Code allows debtors to avoid blanket liens on household furnishings, household goods, clothing, appliances, books, animals, crops, musical instruments, jewelry, tools of the trade, and health aids.
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