Becoming a Secured Creditor
This essay is published for informational purposes only. It is not legal advice, nor is it intended as a substitute for the advice of your attorney.
A secured creditor is one to whom assets have been pledged or guarantees have been offered by the debtor. Any creditor can become a secured creditor. A security interest may allow a creditor company to increase sales by approving customers and assigning credit limits that the customer or applicant would normally not qualify for. The process of becoming a secured creditor is complex. Errors in perfecting a security interest result in improper filings. An improper filing can result in a creditor having only the illusion of being a secured creditor. A creditor must "perfect" its security interest to make it enforceable against third parties.
Secured creditors enjoy an advantage over unsecured creditors if a customer files for bankruptcy protection, and to a lesser extend if the customer account becomes seriously delinquent. The process of becoming a secured creditor is complex and errors can result in creditors believing they are secured creditorsr when in fact they are not. A mechanism exists under the Uniform Commercial Code (the UCC) to identify which creditor's claim is superior to another creditor's. As a rule, the creditor that properly files the lien first has the superior claim.
In order to record a security interest in the property of the debtor, the creditor has to file a document in the State in which the asset(s) pledged as collateral is or are located. That document filed is called a financing statement. A financing statement is intended to put other creditors on notice that a perfected lien or security interest already exists on the customer's assets in question. Creditors are reluctant to rely on assurances offered by the debtor that the asset or assets being pledged are unencumbered by previously filed and perfected security interests. Creditors usually arrange to have the public records examined to determine if prior perfected liens exist.
Customers are sometimes reluctant to allow trade creditors to become secured creditors. In some cases, debtors are prohibited under bank loan agreements from offering assets as collateral to trade creditors. In other instances, debtor companies flatly refuse to pledge assets of the company to creditors. Two of the most frequently stated reasons are that doing so would send the wrong message to other creditors, and that if the debtor does this for one creditor they may have to offer this to all major trade creditors.
Any creditor can become a secured creditor. Secured creditors enjoy an advantage over unsecured creditors if a customer files for bankruptcy protection. In the event of default or bankruptcy, the secured creditor is entitled in effect to foreclose on the assets pledged as collateral, or in the alternative a secured creditor is entitled to receive something of equal value.
© 2010 by Michael C. Dennis. All Rights Reserved.