Becoming a Secured Creditor
By Michael C. Dennis, MBA, CBF

A security interest may allow you to increase sales by accepting customers you would otherwise reject. Any creditor, including a trade creditor can become a secured creditor. It is certainly true that secured creditors enjoy an advantage over unsecured creditors in the event that a customer files for bankruptcy protection - and even in cases in which the customer is delinquent. However, the process of becoming a secured creditor is complex and errors can result in improper filing - offering only the illusion of security to a creditor. You must "perfect" your security interest to make sure it is enforceable against third parties. Some of the most common errors creditors make in trying to perfect a security interest include:

• Failing to list the debtor's business name - and instead filing under their d.b.a.

• Having significant discrepancies between the financing statement and the underlying security agreement [contract].

• Failing to file with the correct State or local government entity or entities

• Using generic descriptions of collateral, such as "all assets." Instead, creditors should be more specific and use collateral descriptions commonly found UCC financing statements.

• Failing to provide an adequate description of the collateral the debtor has pledged to the creditor

• Failing to amend the filing if the debtor moves, changes its name, or moves

• your" collateral

• Shipping goods prior to perfection of the security interest

• Failing to file a continuation statement before the expiration of the security interest

• Failure to include the appropriate fees with your application

• Using the wrong UCC form[s] or out of date forms

• Submitting documents without signatures

• Filing a security interest in assets that have already been pledged by the debtor and against which a previous, perfected security interest already exists. [In this scenario, you have a second priority lien. The first priority creditor must be paid in full before you will receive proceeds from the sale of the collateral.]

One final point, the Uniform Commercial Code says in part that a financing statement substantially complying with the filing requirements will be effective even though it contains minor errors - provided those errors are not "seriously misleading." The trouble with this rule is the term "seriously misleading" is subject to interpretation and the consequences of a Court finding a minor spelling error to be seriously misleading can mean the difference between having a priority claim to the debtor's assets and having an unsecured claim against those same assets.