Bankruptcy And The Secured Creditor Advantage

Bankruptcies were up 32% across the nation in 2009

, leaving no doubt that the embers of the recession are still burning and small businesses are at risk from unpaid invoices. In fact, it may be argued that the collective financial health of its customers forms the foundation by which a small company is protected from - or made vulnerable to - financial disaster.

Generally, goods sold on a line of credit become a security for the creditor. In other words, if a mechanic declares bankruptcy, the tire supplier has rights to the unpaid tires setting on the shelves. What happens, though, if the goods in question are lost to a manufacturing process or, in some other way, are unrecoverable? When a mom and pop operation declares bankruptcy, how do its vendors, often small businesses themselves, keep from getting lost to the mudslide as well?

Being a secured party creditor to high-risk customers offers peace of mind. A secured party creditor offers credit in exchange for a lien on personal property. Personal property, in this sense, means any property that is not real estate, usually property pertaining to the business. The lien does not have to be on the goods that the creditor sold to the debtor, making this arrangement particularly advantageous for the raw material supplier.

In the event of bankruptcy, secured party creditors have certain advantages over those vendors whose loans are unsecured. In any bankruptcy proceeding, grantees have a window of time in which to file a proof of claim. This proof of claim sets forth in writing the details of the debt. If this claim is incorrectly executed, then it could make it vulnerable to dismissal. Even worse, if this proof of claim is not filed within the time frame set forth by the bankruptcy court, then the creditor will likely lose any chance of recovering funds from the bankruptcy. Secured creditors who have filed the Uniform Commercial Code UCC-1 form correctly do not have to file a proof of claim. The pre-bankruptcy lien is sufficient to have a claim in the court proceeding.

Protection from the proof of claim process is not the only reason it is a good idea to be a secured creditor. In bankruptcy proceedings, there is only a finite amount of funds available for distribution. Secured creditors take priority over unsecured loans. The Uniform Commercial Code UCC-1 form, once filed, will give the creditor "priority status" over unsecured loans. In fact, being the first secured creditor on file for a piece of personal property will offer protection against subsequent lien filings.

Bankruptcy makes creditors vulnerable to the same fate. However, entrepreneurs who wisely take advantage of the Uniform Commercial Code UCC-1 form preemptively protect themselves from the losses that backfire from default borrowers.

by: Christine Harrell

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