Indianapolis Secured Transactions Lawyers

How do I perfect a security interest in collateral?

Depending on the location of the borrower, the type and location of the collateral, and other factors, the method of acquiring a security interest may vary significantly and experienced legal counsel should be consulted.  Perfecting a security interest in collateral subject to Article 9 of the UCC requires that (i) the debtor has rights to the collateral; (ii) the grant of the interest be the subject of an agreement (usually written) between the creditor and the borrower; (iii) the provision of some value to the debtor (typically the extension of credit); and (iv) some action by the creditor to put the world on notice of its security interest.  The manner of putting third parties on notice as to the existence of the security interest depends on the type of collateral but is generally accomplished by filing a financing statement (also known as a UCC-1 form) with the applicable Secretary of State’s office.

How long does my security interest last?

When a creditor files a financing statement with the Secretary of State, absent certain exceptions, that financing statement is effective for five (5) years from the date it is filed. Creditors may extend that time period by filing a continuation statement with the Secretary of State. Such continuation statements must be filed before the five year expiration date, but not earlier than six months prior to that expiration date.

What happens to my security interest when the debtor files for bankruptcy?

When a debtor files bankruptcy, creditors with a perfected security interest in that debtor’s collateral have the opportunity to file a proof of claim specifically designating the secured nature of their claim, and may also consider filing for relief from stay with the Bankruptcy Court or entering into an reaffirmation agreement with the debtor to allow the debtor to keep the property in exchange for payment of the full value of the collateral.  There are numerous potential issues that may arise with respect to secured creditors in bankruptcy, and readers are encouraged to contact Rubin & Levin to discuss any such issues.

What is an Article 9 Sale?

Under Article 9, a secured creditor is entitled to take possession of its collateral without assistance from the courts as long as that repossession does not create a breach of the peace. Where the borrower consents, it can surrender the assets to the creditor, and cost/fee-shifting provisions in the security agreement provide some incentive for borrower cooperation. Once the borrower has surrendered the collateral to the creditor, the creditor has the right to sell the collateral, apply the proceeds to the debt, and pursue the remaining balance owed as long as the creditor does so in a “commercially reasonable manner.”

“Commercially reasonable manner” can include sale of the collateral to the creditor itself, provided that such a sale is made on a recognized market or subject to standard price quotations. In some circumstances and subject to certain notices, the creditor can also retain the collateral in satisfaction of the debt and avoid any issues relating to sale.

In order to effectuate an Article 9 sale or retention in satisfaction, the creditor must provide notice to the debtor, any guarantor, as well as to any junior lien creditors with an interest in the collateral (as identified by a search for other applicable UCC financing statements indexed to the debtor). Such notice must provide a description of the collateral, the intended sale or disposition, the time and place of the sale or disposition, and must advise the borrower of its liability for a deficiency and that it is entitled to an explanation of any unpaid debts or charges.

The purchaser at such a sale receives the debtor’s interest in the collateral free and clear of the lien of the creditor initiating the sale, as well as the liens of all other properly noticed junior lienholders.