Question

1) If you are a creditor, should you perfect your security interest and why?

2) What if there are two perfected security interests on the same property?  Which interest comes first?

3) What is the automatic stay in bankruptcy?

Answer 1

1) If you are a creditor, should you perfect your security interest and why?

2) What if there are two perfected security interests on the same property?  Which interest comes first?

A secured transaction is a loan or purchase that is secured by collateral. It involves a borrower or buyer, technically known as the debtor, and a lender or seller, technically known as a creditor, and more specifically known as a secured party. Common secured transactions include a bank loaning a business money so the business can buy inventory, or a company selling a business equipment on credit. In these transactions, the business is the debtor, the bank or the selling company is the creditor, and, most likely, the inventory or equipment will be at least part of the collateral.

Under Article 9 of the Uniform Commercial Code (UCC), which covers secured transactions, in order for a creditor to become a secured party—that is, a party with a legal right to take possession of collateral in the event of the debtor’s failure to pay—the creditor must take special steps. These steps are known asattachment of a security interest. Moreover, in order for a secured party to more fully ensure its legal rights in the event that other parties are asserting an interest in the same piece of collateral, the secured party must take additional steps. These additional steps are known as perfecting a security interest. Here we’ll look at both attachment and perfection of security interests.

Value. A secured transaction is a contract between the debtor and the secured party. Like most contracts, there must be an exchange of consideration between the parties. In other words, there must be an exchange of value. In the case of secured transactions, the value given by the secured party is usually obvious. For example, a bank gives value to a debtor when, in conjunction with a security agreement, it loans money to the debtor to buy inventory. Similarly, a seller gives value to a debtor when, in conjunction with a security agreement, it sells equipment to the debtor.

Debtor’s rights in collateral. A business may have rights in collateral either by owning the collateral prior to the secured transaction or by purchasing the collateral as part of a secured transaction. When a business already owns certain property, it should be clear that the business has rights in that property, and can use it as collateral. In other cases, a business will buy items (materials, inventory, machinery and so on) on credit and want to use those same items as collateral. In such cases, the business will sign a conditional sales contract, which is also considered a security agreement, and which, under UCC sales rules, will give the business the necessary rights in the purchased items to use them as collateral. (Note: the alternative option of having the “power to transfer” the collateral often involves relatively unusual circumstances and is not covered here.)RED LISTINGS

Security agreement. For purposes of attachment, the debtor must “authenticate” a security agreement. In other words, the debtor must sign the agreement. (The UCC uses the term “authenticate” to include the possibility of electronic signatures.) A security agreement normally will contain a clear statement that the debtor is granting the secured party a security interest in specified goods. The agreement also must provide a description of the collateral. Section 9-108 of the UCC indicates generally that a description of collateral is sufficient “if it reasonably identifies what is described.” The same section then goes on to provide a half-dozen different possibilities for a reasonable identification, such a “specific listing,” a “category,” or a “quantity.” While the description of collateral in a security agreement may not need to be finely detailed, the UCC prohibits descriptions of collateral that are “supergeneric,” such as “all the debtor’s assets” or “all the debtor’s personal property.”

The UCC recognizes that some security agreements are quite complex, and, therefore, has various special rules regarding certain possible agreement terms. To take just one example, a security agreement may include a clause that the collateral is to include property that the debtor acquires after the agreement is signed. For the most part, the UCC allows parties to use “after-acquired property” as collateral; however, the UCC does not allow after-acquired consumer goods to serve as collateral.

The three requirements of: giving value, debtor rights in the collateral, and an authenticated security agreement apply to the most common types of collateral, such as equipment, inventory and even payments due under a contract. However, for certain less common types of collateral, the requirements relating to an authenticated security agreement may vary.

Perfection

A secured party perfects a security interest in order to help assure that no other party, such as another creditor or a bankruptcy trustee, will be able to claim the same collateral in the event that the debtor becomes insolvent. By perfecting its security interest, a secured party seeks to gain priority over other parties regarding the collateral.

The precise details of how to perfect a security interest depend in part on the local jurisdiction where the collateral is located. However, generally speaking, the primary ways for a secured party to perfect a security interest are:

Related Ads

• by filing a financing statement with the appropriate public office
• by possessing the collateral
• by “controlling” the collateral; or
• it's done automatically upon attachment of the security interest.

Of these four listed items, the first--filing a financing statement--is by far the most common and important to understand.

Financing statement. Security interests for most types of collateral are usually perfected by filing a document known simply as a financing statement. The purpose of the financing statement, which is filed with a public office such as the Secretary of State, is to put other people on notice of the secured party’s security interest in the collateral. The UCC specifies what must be contained in a financing statement:

• the name of the debtor
• the name of the secured party; and
• an indication of the collateral.

Regarding the first of these items, it is important that the name of the debtor be sufficiently specific and accurate, because financing statements are filed under the debtor’s name. If the name on the statement is wrong, the statement will fail to provide adequate notice to others, and will not succeed in perfecting the security interest. Section 9-503 of the UCC provides various, more specific rules regarding the sufficiency of a debtor’s name on a financing statement. For example, if the debtor is a “registered organization,” which might mean a corporation or limited liability company organized under a particular state’s law, then the name on the financing statement must match the name of the debtor as registered with the state. The second required item on the statement, the name of the secured party, is generally a straightforward matter. Finally, as to the third item, the rules for indication of collateral on the financing statement are largely the same as for the description of collateral on a security agreement (see above). However, unlike with a security agreement, on a financing statement it is acceptable to use a “supergeneric” description of collateral.

A standard form, known as Form UCC-1, is widely used by secured parties to file a financing statement. You can easily find a sample UCC-1 online. While many financing statements must be filed with the Secretary of State, you should check your own state’s laws for more information. As a final point, be aware that a financing statement can be, and sometimes is, filed before a security interest has attached; creditors do this in anticipation of creating a security interest, in order to make sure that the interest is perfected immediately upon attachment.

Possession. A security interest in many types of collateral, including “negotiable documents, goods, instruments, money, or tangible chattel paper,” may be perfected by the secured party possessing the collateral. However, so-called “intangible” collateral, such as accounts receivable, cannot be perfected by possession. While “possession” is not directly defined by the UCC in this context, it does appear to include possession not only by the secured party but also by an agent of the secured party.

Control. The UCC states that, “A security interest in investment property, deposit accounts, letter-of-credit rights, or electronic chattel paper may be perfected by control of the collateral . . . .” The meaning of “control” can vary depending on which type of collateral is involved. For example, a secured party may have control of a deposit account if the bank, the debtor and the secured party have all agreed that the secured party may handle the funds in that account “without further consent by the debtor.” As another example, a secured party has control over investment property, such as securities (shares of stock or the like), if the property is delivered to the secured party, and, if necessary, “endorsed” (signed) to the secured party.

Automatically upon attachment. The most important type of security interest that is perfected immediately upon attachment is what is known as a purchase-money security interest (PMSI) in consumer goods. A PMSI generally involves either: (1) a debtor buying an item on credit from a seller where the seller will be the secured party; or (2) a debtor using a loan from a bank directly to buy an item from a seller, where the bank will be the secured party. When the debtor in one of these circumstances is buying consumer goods, the secured party (seller or bank) does not need to file a financing statement in order to perfect the security interest. Note, however, that, while it may not be necessary to file a financing statement, not all security interests in PMSIs in consumer goods are perfected upon attachment. For example, some statutes governing certificates of title, such as for cars, require that a security interest be indicated on the certificate in order for the interest to be perfected. Finally, be aware that the UCC states that perfection occurs automatically upon attachment for about a dozen other relatively unusual types of collateral. (For more information, check UCC Section 9-309.)

Having covered the main ways to perfect a security interest, it is important to note that there may be situations where a secured party with a perfected security interest would still have that interest subordinated to some other party. However, in most cases, perfecting a security interest provides very substantial protection of that interest.

3) What is the automatic stay in bankruptcy?

Once you file for bankruptcy, an automatic stay kicks in and protects you from your creditors and bill collectors. The automatic stay stops any lawsuit that is filed against you by a creditor, collection agency, government entity or other person seeking money from you. The automatic stay is a powerful tool that you should seriously consider if you are in trouble. For example, if you are behind on child support payments, about to be evicted from your home, or if the utility companies have been threatening to turn off your service, then the automatic stay can be a lifesaver.

What the Automatic Stay Can Do For You

There are several things that the automatic stay can do for you and your financial situation. These include:

Stopping Your Utilities From Being Disconnected

Sometimes when you are behind on a utility bill, the utility company will threaten to turn off your telephone, gas, electric or water service. The automatic stay will often prevent the utility company from turning off your service for at least 20 days. Even though your utility bill is probably not high enough to justify filing for bankruptcy by itself, it may influence your decision to not have your gas and electricity if it's the middle of winter.

Stopping Foreclosure Proceedings

If the bank or the financial institution that holds your mortgage is starting foreclosure proceedings, the automatic stay will stop the foreclosure in its tracks. However, even if it is temporarily stopped, your bank will most likely find a way to continue the foreclosure proceedings once the automatic stay is lifted. If keeping your house is one of your primary goals, you should consider filing for Chapter 13 bankruptcy instead of Chapter 7.

Stopping Evictions

The automatic stay may be able to stall an eviction proceeding if your landlord is trying to evict you. However, because of recent changes to the laws regarding the automatic stay, if your landlord already has a court issued wrongful possession judgment against you, the automatic stay will not stop your landlord from evicting you. Also, even if your landlord has not started eviction proceedings against you, the automatic stay may only buy you a few days or weeks in your current home.

Generally, courts will side with landlords if the landlord can show that you are misusing the property, endangering it, or selling or using controlled substances on the property. In addition, even if you have been a model tenant, courts will generally side with the landlord if he or she asks the court for permission to evict you.

Stopping a Government Agency From Taking Back Overpayments of Public Benefits

If you were receiving public benefits before you filed for bankruptcy, the automatic stay will stop the agency from collecting any benefits that were overpaid to you until the automatic stay is lifted. Normally, the agency would collect the overpayment from you either by billing your or deducting from your future benefit checks. However, if you become ineligible to receive public benefits during your bankruptcy, the automatic stay will not stop the agency from collecting the overpayments from you.

Stopping wage garnishment

Once you file for bankruptcy, the automatic stay stops all wage garnishments until the automatic stay is lifted. If you have multiple garnishments against your wages, then you may want to consider filing for bankruptcy as it would allow you to take home your entire salary.